Bus  Admin..  Lit. 

HF 
5667 


Bus.  Admin 
Lib. 


RENN'S 
PRACTICAL  AUDITING 


THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


This  book  is  DUE  on  the  last  date  stamped  below 


' 


JUL  2  1  1943 


PRIVATE  L^ 


No.  ............... 

THOMAS  KEPPEL, 

ZEELAND,    MICH. 


yNlVERSHY  OF  CAUF9RNIA, 


Library 

Graduate  ScV)  iol  of  Business  Administration, 
University  of  California 


-t^VT^A^^ 


Renn's  Practical 
Auditing 

A  Working  Manual  for  Auditors 


DESCRIBING  IN  COMPLETE  DETAIL  THE  METHOD 

OF   CONDUCTING   A   COMMERCIAL  AUDIT, 

AND  INDICATING  IN  PROPER  ORDER 

THE   SUCCESSIVE   STEPS   OF 

PROCEDURE, 

WITH 
A     GENERAL     TREATISE     ON     AUDITING 


BY 
GEORGE     B.     RENN 

ACCOUNTANT  AND  AUDITOR 


SECOND  EDITION,   REVISED  AND  ENLARGED 


PRICE    THREE  DOLLARS 


PUBLISHED   BY 

GEORGE  B.  RENN 

1341    Dakin    Street 
CHICAGO,    ILLINOIS 

81831 


Entered  according  to  act  of  Congress,  in  the  year  1905, 

By  GEORGE;  B.  RENN, 

in  the  office  of  the  Librarian  of  Congress,  at  Washington. 

Entered  according  to  act  of  Congress,  in  the  year  1907, 

By  GEORGE  B.  RENN, 

in  the  office  of  the  Librarian  of  Congress,  at  Washington. 
All  rights  reserved. 


PRINTED  AND  BOUND  BY 
GEORGE  SETON  THOMPSON,  CHICAGO,  ILLINOIS 


HF 


\s 

NL 


PREFACE  TO  THE  SECOND  EDITION 

^ 

\  The  general  commendation  which  the  first  edition   of  this 

manual  elicited  from  the  accountancy  profession,  the  press,  and 
discriminating  students,  proved  that  there  is  a  demand  for  a 
work  which  goes  direct  to  the  point  on  the  subject  of  auditing. 
This  has  encouraged  the  author  to  prepare  a  more  extensive 
treatise  based  upon  the  same  plan. 

In  this  edition,  as  in  the  first,  one  of  the  principal  claims  to 
excellence  lies  in  its  distinctively  practical  treatment  of  the  sub- 
ject. This  book  aims  to  tell  the  student  what  to  do  and  how  to 
do  it,  and  it  is  written  with  the  intention  that  its  contents  shall 
be  understood  by  the  reader. 

The  Detailed  Description  of  a  Commercial  Audit,  presented  in 
the  logical  order  of  the  procedure  to  be  followed,  which  stamped 
the  first  edition  as  unique  in  the  literature  on  auditing,  is  re- 
printed in  its  entirety  in  Part  II  of  the  present  manual.    That 
<i 

U>      part  has  also  been  elaborated  in  order  to  clear  up  such  points  as 

appeared  from  the  inquiries  of  readers  to  be  in  the  least  doubtful ; 
and  an  important  feature  has  been  added  in  the  shape  of  an  AUDI- 
TOR'S REPORT  in  complete  detail,  made  out  according  to  standard 
form. 

}The  whole  work  has  been  amplified  by  the  addition  of  a 
thorough  exposition  of  the  principles  of  auditing;  with  an  elab- 
orate treatise  on  EXAMINATIONS,  INVESTIGATIONS,  and  PARTNER- 
SHIP AUDITING;  also  the  special  considerations  which  govern 
auditing  in  different  lines  of  business;  so  that  it  is  believed  that 
this  new  edition  covers  the  subject  adequately  from  every  point  of 
view. 

1341  DAKIN  STREET,  CHICAGO,  JULY,  1907. 


PREFACE  TO  THE  FIRST  EDITION 

All  the  literature  on  auditing  published  heretofore  presup- 
poses familiarity  with  the  rules  of  practice  on  the  part  of  the 
student;  hence  the  information  thus  far  obtainable  upon  this 
subject  is  of  too  indefinite  a  character  to  be  understood  easily 
by  that  large  class  of  accountants  who  are  otherwise  excellently 
equipped  for  auditing,  but  who  are  lacking  in  experience. 

The  purpose  of  this  manual  is,  therefore,  to  set  forth  minute- 
ly the  details  to  be  pursued  in  making  a  commercial  audit,  and  to 
indicate  in  proper  order  the  procedure  to  be  followed. 

With  this  brief  explanation  the  book  is  respectfully  submitted 
to  ambitious  accountants. 


CONTENTS 

• 

INTRODUCTION Page  11 

Definition  of  Auditing — The  benefit  to  the  client  from  an  in- 
dependent audit — To  whom  the  work  should  be  entrusted. 

PART  I 

GENERAL    CONSIDERATION    OF    PRINCIPLES    AND 
METHODS  Page  13 

Qualifications  of  an  auditor — The  elemental  aim  in  auditing — 
Rudimentary  requirements  of  accountancy — Special  method  for 
checking  the  cash  book — The  different  kinds  of  errors  in  account- 
ancy; characteristic  examples  of  each  kind;  how  brought  to  the 
auditor's  notice — Some  of  the  schemes  employed  for  falsifying, 
and  methods  for  their  detection — Classification  of  various  lines 
of  business  according  to  their  auditing  features — Different  kinds 
of  audits — The  auditor's  relation  to  his  client — His  responsibil- 
ity— His  attitude  toward  the  office  staff. 

VOUCHERS.  What  constitutes  a  voucher;  convenience  of  uni- 
form vouchers ;  what  may  be  accepted  as  substitutes. 

ANALYSIS  OF  ACCOUNTS.  Purpose  of  analysis — Proper  ruling 
of  analysis  paper — Posting  to  analysis  sheet — Convenient  time 
for  posting. 

7 


8  RENN'S  PRACTICAL  AUDITING 

CONTROLLING  ACCOUNT.  Its  purpose — Method  of  conducting 
the  controlling  account — How  it  is  used  to  prove  the  individual 
accuracy  of  the  personal  accounts — Illustrations  of  controlling  ac- 
counts. 

AUDITOR'S  WORKING  SHEET.  Its  uses — Illustration  of  a  work- 
ing sheet. 

TURNOVER.    Defined  and  illustrated. 


PART  II 

PRACTICAL  AUDITING    Page   29 

Description  in  complete  detail  of  the  method  of  conducting  a 
commercial  audit,  arranged  to  indicate  in  proper  order  the  suc- 
cessive steps  of  procedure,  and  concluding  with  an  auditor's 
report  made  out  in  standard  form. 

This  division  of  the  manual  deals  with  the  actual  work  of 
auditing ;  it  tells  at  the  beginning  what  to  do  first  and  how  to  do 
it ;  then  the  next  step  in  order  is  similarly  taken  up  and  explained, 
and  in  this  manner  the  student  is  guided  step  by  step  through  an 
entire  audit.  Important  principles  involved  in  different  features 
of  the  audit  are  called  to  the  student's  attention  at  the  points 
where  they  apply.  In  conclusion,  an  extensive  report  is  reprinted 
exactly  as  it  was  rendered  in  practice. 

PART  III 

SPECIAL  AUDITS Page  101 

FIRST  AUDIT  OF  BOOKS  OF  CORPORATIONS.  Precise  directions 
for  auditing  the  corporation  books  as  distinguished  from  the 
trade  books  of  account. 


CONTENTS  9 

PERIODICAL  AUDIT.  Definition — Analogous  to  the  audit 
described  in  Part  II. 

CONTINUOUS  AUDIT.  Wherein  it  differs  from  the  periodical 
audit. 

INVESTIGATION  ON  ACCOUNT  OF  SUSPECTED  FRAUD.  An  elab- 
orate article  on  this  subject,  treating  the  question  from  various 
standpoints  according  to  the  department  under  suspicion. 
Exactly  what  steps  to  take  in  case  of  a  suspected  cashier,  conceal- 
ment of  sales,  shipment  of  goods  without  entry,  outright  theft 
of  merchandise,  fraud  in  the  purchasing  department,  or  merely  a 
suspicion  that  "something  is  wrong." 

EXAMINATION  ON  BEHALF  OF  AN  INTENDING  PURCHASER. 
The  subject  is  treated  in  a  very  comprehensive  manner.  Some 
features  of  this  section  are :  Purpose  of  the  examination — Inspec- 
tion of  the  statistical  accounts — Period  to  be  covered — Speculative 
considerations — The  examination  in  detail — Accounts  receivable 
and  bills  receivable — Stock  of  merchandise — Real  estate,  build- 
ings and  personal  property — Good  will — Patents — Copyrights — A 
condensed  outline  of  an  examination — Special  directions  in  regard 
to  construction  of  the  Trading  account  and  the  Profit  &  Loss 
account — How  to  ascertain  the  amount  of  working  capital  em- 
ployed— Estimating  the  inventory — Liabilities  not  necessarily  any 
concern  of  the  purchaser — Their  significance  in  relation  to  the 
prosperity  of  the  business. 

EXAMINATION  ON  BEHALF  OF  A  CREDITOR,  ACTUAL  OR  PROS- 
PECTIVE. This  section  covers  the  subject  thoroughly,  in  reference 
to  either  secured  or  unsecured  loans.  The  points  towards  which 
the  examination  should  be  directed  are  clearly  indicated,  and 
detailed  instructions  follow. 

FINAL  AUDIT  FOR  ADJUSTMENT  OF  PARTNERSHIP  IN  CASE  OF 
DECEASED  OR  RETIRING  PARTNER.  Complete  directions  are  given 


10  RENN'S  PRACTICAL  AUDITING 

for  conducting  this  kind  of  an  audit  with  due  regard  to  the  rights 
of  each  partner. 

DIFFERING  FEATURES  IN  AUDITS  OF  VARIOUS  LINES  OF  BUSI- 
NESS. This  section  directs  attention  to  features  of  special  impor- 
tance in  auditing  particular  lines  of  business.  Under  this  head 
are  treated  Trading,  Manufacturing,  Mining  and  Banking  con- 
cerns. 

INDEX  Page    128 


INTRODUCTION 

By  the  term  "Auditing"  is  meant  the  intelligent  inspection  of 
books  of  account  and  subsidiary  records  and  papers,  for  the  pur- 
pose of  determining  whether  they  are  correct  and  complete. 

The  advantages  of  an  independent  audit  may  be  summarized 
as  affording  a  client  the  means  for  detecting  any  dishonesty  there 
may  be  on  the  part  of  his  employes,  and,  on  the  other  hand,  if 
none  is  found,  he  will  learn  from  a  disinterested  source  that  his 
books  are  being  kept  correctly.  Where  inspection  proves  that 
improvements  in  the  methods  of  accounting  would  be  desirable, 
he  will  also  be  given  expert  suggestion  along  those  lines. 

In  addition  to  the  tangible  benefits  outlined  above,  it  may  be 
mentioned  that  knowledge  of  an  intention  to  have  the  books 
audited  at  some  time  tends  to  discourage  fraudulent  practices — an 
effect  which  is  not  to  be  overlooked.  Aside  from  any  question  of 
dishonesty,  the  anticipation  of  an  audit  inspires  also  a  desire  that 
the  books  shall  be  found  technically  correct,  which  prompts  a 
degree  of  care  in  their  preparation  that  would  often  be  lacking 
were  no  inspection  looked  for. 

In  order  to  derive  the  best  results  from  an  audit,  it  should  be 
entrusted  to  a  professional  auditor,  for  he  will  be  independent  of 
local  influences  and  may  therefore  be  relied  on  to  treat  matters 
in  a  disinterested  manner. 


n 


PART  I 

GENERAL  CONSIDERATION   OF  PRINCIPLES   AND 

METHODS 

The  auditor  should  possess  a  thorough  working  knowledge  of 
accountancy,  in  order  to  qualify  him  for  interpreting  correctly  the 
work  of  others  and  for  making  intelligent  criticism  when  neces- 
sary. 

The  elemental  aim  in  auditing  is  to  safeguard  the  income  and 
to  keep  watch  on  the  expenditures  of  the  business.  To  that  end 
the  auditor  must  ascertain  whether  the  following  rudimentary 
requirements  of  accountancy  have  been  complied  with: 

First.  That  charges  have  been  made  to  the  proper  parties 
upon  the  regular  books  of  account  for  everything  of  value  which 
has  passed  to  them. 

Second.  That  all  money  received  has  been  entered  in  the 
cash  book,  and  that  it  was  entered  at  the  time  when  it  was 
received. 

Third.  That  no  credit  has  been  given  to  any  one  not  entitled 
to  it. 

Fourth.  That  no  money  has  been  paid  out  without  proper 
authority,  and  that  no  fabricated  payments  have  been  entered  in 
the  cash  book. 

Fifth.  That  the  proper  amount  of  money  called  for  by  the 
cash  book  balance  is  actually  on  hand — either  in  bank,  or  in  the 

cash  drawer. 
is 


14  RENN'S  PRACTICAL  AUDITING 

Sixth.  That  the  open  Accounts  Receivable  (debtors'  ac- 
counts) and  Bills  Receivable,  represent  correctly  the  difference 
between  the  charges  for  sales,  etc.,  on  the  one  hand,  less  the 
credits  through  the  cash  book  and  other  authorized  mediums,  on 
the  other  hand. 

Seventh.  That  all  other  assets  acquired  through  the  business 
are  correctly  recorded,  and  that  they  exist  in  fact.  This  includes 
inventories. 

Eighth.  That  Accounts  Payable  (creditors'  accounts)  and 
Bills  Payable  are  correctly  and  fully  stated,  and  that  they  were 
incurred  in  the  interest  of  the  business.  In  the  case  of  bills 
payable  discounted,  it  must  be  ascertained  whether  the  proceeds 
were  entered  in  the  cash  book. 

It  will  be  observed  that  the  trend  of  the  foregoing  is  con- 
stantly to  force  the  entry  of  cash  receipts  into  the  cash  book,  and 
to  provide  for  the  proper  recording  of  values  parted  with. 

Usually  there  is  not  much  attempt  to  defraud  by  direct  theft 
of  merchandise,  although  the  conscientious  auditor  will  satisfy 
himself  that  proper  safeguards  are  in  force  to  prevent  it.  The 
principal  efforts  of  an  embezzler,  however,  are  directed  toward 
the  abstraction  of  cash,  and  for  that  reason  a  special  method  for 
checking  the  cash  book  is  suggested  in  this  manual,  viz. :  that  the 
cash  book  shall  be  checked  inversely  from  the  ledgers.  This 
process  will  determine  positively  that  the  items  entered  in  the 
ledgers  as  "cash"  are  so  in  fact  if  they  are  found  in  the  cash 
book,  because  they  will  then  have  to  be  accounted  for.  Other- 
wise, if  the  auditor  should  remain  content  with  checking  the 
cash  book  into  the  ledgers,  it  might  happen  that  all  items  tested 
in  this  way  would  check  correctly,  while  still  others  would  remain 
unchecked  in  the  ledgers,  falsely  stated  as  "cash,"  but  originating 
elsewhere,  probably  in  the  journal.  This  leads  to  a  detailed  con- 
sideration of  the  subject  of  correctness  of  the  books,  as  indicated 
by  their  freedom  from  errors. 


PRINCIPLES  AND   METHODS  15 

ERRORS  IN  ACCOUNTANCY 

There  are  three  kinds  of  errors  which  may  find  their  way  into 
books  of  account,  and  it  is  the  duty  of  the  auditor  to  detect  them 
when  present,  or  to  prove  their  absence.  They  are: 

ERRORS  OF  PRINCIPLE. 
TECHNICAL  ERRORS. 
FRAUD. 

Errors  of  Principle. 

This  kind  of  errors  divides  into  two  minor  classes — those  of 
omission  and  those  of  commission.  One  of  the  most  serious  is 
the  omission  to  provide  proper  reserves  for  depreciation  of  assets 
subject  to  wear  and  tear,  or  for  shrinkage  in  values.  Sometimes 
this  results  in  the  payment  of  dividends  out  of  capital,  a  pro- 
ceeding which  has  been  construed  by  courts  as  criminal;  and  in 
one  instance,  at  least,  it  has  called  forth  an  order  from  the  court 
compelling  the  directors  who  voted  the  dividend  to  make  resti- 
tution to  the  treasury  of  the  corporation. 

As  an  example  of  errors  of  principle  through  commission,  we 
may  cite  the  incorrect  distribution  of  purchase  invoices  or  of 
expense  outlays,  resulting  in  the  loading  of  capital  accounts  with 
charges  which  should  be  placed  to  expense,  or  vice  versa. 

The  question  of  provision  for  reserves  will  come  to  the  audi- 
tor's notice  through  inspection  of  the  balance  sheet,  and  the  point 
in  respect  to  proper  distribution  is  disposed  of  through  analysis 
of  the  capital  accounts  and  the  various  expense  accounts. 

Technical  Errors. 

These  are  the  innocent  mistakes  committed  in  the  mechanical 
details  of  bookkeeping — such  as  posting  to  wrong  accounts,  unin- 
tentional errors  in  footings  or  in  carrying  them  forward,  in  trans- 
ferring accounts,  etc.  The  auditor  will  detect  such  errors  through 


16  RENN'S  PRACTICAL  AUDITING 

the  detail  work  of  checking  postings,  verifying  footings,   and 
general  inspection  of  the  books. 

Fraud. 

Under  this  head  come  the  numerous  schemes  employed  to 
falsify  the  books  of  account  for  the  purpose  of  stealing  cash  or 
merchandise. 

It  would  be  impossible  to  describe  all  the  expedients  which 
may  be  used  to  accomplish  theft,  but  among  them  are  the  with- 
holding outright  of  cash  received  from  cash  sales  or  through 
remittances  from  customers;  the  "kiting"  of  such  remittances; 
the  falsification  of  cash  book  footings ;  the  introduction  of  fictitious 
bills  receivable;  the  manipulation  of  purchase  invoices;  the 
clandestine  disposal  of  merchandise,  and  so  forth  indefinitely. 

The  withholding  of  cash  from  customers'  remittances  is  usually 
concealed  on  the  books  by  crediting  the  customers  fictitiously  with 
an  equal  amount  through  the  journal,  or  the  "merchandise 
returned"  book,  thus  balancing  the  account  and  withdrawing  it 
from  observation. 

"Kiting"  begins  with  pocketing  remittances  when  they  are 
received  and  withholding  credit  for  them  until  a  later  date;  then 
other  remittances  will  be  held  out  and  credit  will  be  entered  for 
those  first  withheld.  Industrious  embezzlers  have  been  known  to 
carry  this  process  to  great  lengths,  until  an  auditor  appeared  and 
exposed  the  trick  by  means  of  verification  statements  sent  out 
privately  to  the  book  debtors. 

As  regards  the  other  methods  for  defrauding  referred  to  in 
this  article,  an  exact  observance  of  the  rules  for  auditing  set  forth 
in  this  manual  will  circumvent  them  also. 

CLASSIFICATION  OF  DIFFERENT  LINES  OF 
BUSINESS 

Although  the  general  principles  of  auditing  are  the  same  for 
all  lines  of  business,  the  methods  to  be  followed  in  different  audits 


PRINCIPLES  AND  METHODS  17 

vary  somewhat  according  to  the  classification  of  the  enterprise. 
From  their  auditing  features  the  various  kinds  of  business  may 
be  classified  as  follows: 

TRADING. 

MANUFACTURING. 

MINING. 

BANKING. 

The  auditor  should  always  have  a  fair  knowledge  of  the  work- 
ing details  of  the  business  which  he  undertakes  to  audit.  Where 
he  is  lacking  in  this  respect  he  may  acquire  such  knowledge  by 
studying  a  text-book  on  accounting  in  that  particular  line. 

DIFFERENT  KINDS  OF  AUDITS 

Audits  differ  according  to  the  immediate  objects  for  which 
they  are  undertaken;  the  following  are  regarded  as  the  principal 
kinds : 

The  Periodical  Audit,  to  determine  the  general  accuracy  of 
the  books. 

Investigation,  on  account  of  suspected  fraud. 

Examination,  on  behalf  of  an  intending  purchaser,  to  deter- 
mine the  earning  capacity  of  a  business ;  or  for  a  creditor,  actual 
or  prospective,  to  establish  the  correctness  of  the  balance  sheet. 

The  Final  Audit,  for  the  purpose  of  partnership  adjustment 
in  the  case  of  a  retiring  or  deceased  partner. 

There  are  other  conditions  that  call  for  audits,  but  those  above 
mentioned  are  the  more  usual  cases. 

A  complete  description  of  all  the  various  kinds  of  audits, 
together  with  their  possible  ramifications,  would  prove  entirely 
too  complex  and  confusing  to  the  student.  For  that  reason,  and 
because  the  greater  number  of  audits  are  made  merely  for  the 
purpose  of  ascertaining  the  general  correctness  of  books  of  ac- 
count, it  is  believed  by  the  author  that  a  detailed  description  of 


18  RENN'S  PRACTICAL  AUDITING 

THE  PERIODICAL,  AUDIT  will  serve  best  to  familiarize  the 
student  with  the  principles  and  methods  of  auditing.  In  accord- 
ance with  this  idea  the  detailed  instructions  in  this  manual  are 
limited  in  the  first  instance  to  a  specimen  audit  of  that  kind. 
However,  to  make  the  manual  complete,  there  have  been  added 
supplementary  instructions  in  regard  to  other  kinds  of  audits, 
which,  considered  in  connection  with  the  detailed  directions  pre- 
ceding them,  will  qualify  the  student  to  carry  out  any  one  of  the 
audits  mentioned. 

In  concluding  this  chapter  a  few  words  in  regard  to  the 
auditor  himself  will  be  in  order. 

THE  AUDITOR'S  RELATION  TO  HIS  CLIENT 

The  auditor's  relation  to  his  client  is  of  an  extremely  confi- 
dential nature,  and  all  information  obtained  by  him  through  that 
relation  must  be  held  inviolate.  Nothing  can  be  more  out  of  place 
than  a  garrulous  auditor. 

Sometimes  there  is  a  disposition  on  the  part  of  young  auditors 
to  make  impetuous  criticisms  and  suggestions.  They  should 
defer  all  comments  until  the  audit  is  completed,  for  something 
may  develop  meanwhile  to  modify  their  hastily  formed  opinions. 

THE  AUDITOR'S  RESPONSIBILITY 

There  is  no  record  of  any  legal  decision  in  this  country  fixing 
liability  upon  auditors  for  certifying  to  inaccurate  or  untruthful 
statements.  Where  deliberate  mendacity  could  be  proven  there 
would  probably  be  ground  for  action,  but  manifestly  it  would  be  a 
hard  matter  to  establish  the  "intent"  in  such  a  case. 

Virtually  this  makes  the  public  dependent  upon  the  personal 
integrity  of  the  auditor  for  the  truthfulness  of  statements  con- 
tained in  his  report,  which  imposes  a  moral  responsibility  that 
he  should  not  attempt  to  evade  in  any  particular.  His  reports 
should  be  complete,  definite  and  absolutely  correct.  Only  a  high 


PRINCIPLES   AND   METHODS  19 

professional  standard  will  bring  him  business  of  the  desirable 
kind,  as  no  auditor  can  hope  to  be  permanently  successful  unless 
he  commands  a  reputation  for  perfect  reliability  in  his  profes- 
sional capacity. 

THE  AUDITOR'S  ATTITUDE  TOWARD  THE  OFFICE 

STAFF 

The  auditor  should  conduct  himself  courteously  toward  the 
office  force,  so  far  and  so  long  as  they  enable  him  to  do  so  con- 
sistently. While  it  is  true  that  his  position  is  sometimes  made 
unpleasant  through  the  boorish  attitude  of  some  of  the  staff,  it 
does  not  help  matters  to  be  openly  resentful;  and,  in  passing,  it 
may  be  remarked  that  sometimes  auditors  are  the  authors  of  their 
own  misfortunes  in  this  respect,  through  an  assumption  of  superi- 
ority which  engenders  antagonism. 

A  great  deal  may  be  accomplished  in  this  direction  by  the 
auditor  himself  setting  an  example  of  gentlemanly  deportment. 
This  does  not  mean,  however,  that  he  should  yield  one  iota  of 
his  freedom  to  investigate  to  any  extent  any  "lead"  which  he  may 
desire  to  follow;  on  the  contrary,  he  must  regard  himself  as  an 
independent  agent,  and  proceed  without  fear  or  favor. 


20  RENN'S  PRACTICAL  AUDITING 

VOUCHERS 

A  great  many  business  concerns  use  their  own  form  of  voucher 
for  disbursing  cash,  the  same  being  approved  and  certified  as  cor- 
rect by  certain  officials  or  authorized  employes.  While  this  is 
convenient  and  desirable,  it  should  be  understood  that  an  invoice 
itself,  if  properly  made  out  to  your  client  and  duly  approved, 
is  equally  competent  as  a  voucher.  Therefore,  wherever  this 
manual  calls  for  vouchers  either  in  support  of  cash  payments 
or  for  journal  entries,  any  memorandum  which  will  establish 
the  validity  of  the  transaction  should  be  accepted  as  satisfactory. 
Your  report,  however,  should  suggest  the  introduction  of  regula- 
tion vouchers,  if  considered  desirable. 

ANALYSIS  OF  ACCOUNTS 

For  the  purpose  of  analyzing  the  various  expense  accounts 
and  capital  accounts,  use  paper  ruled  in  a  series  of  parallel  debit 
and  credit  columns.  At  the  top  of  the  sheet  write  the  caption  of 
the  account  under  analysis,  and  sub-head  the  classification  col- 
umns; then  from  the  books  of  original  entry  post  the  items  into 
the  proper  columns  of  this  analysis  sheet;  when  completed,  the 
net  balance  of  all  the  columns  combined  should  equal  the  amount 
of  the  account  as  shown  in  the  ledger.  This  analysis  may  be 
made  at  the  time  of  checking  the  invoices  against  the  particular 
items  in  the  books,  or  it  may  be  made  a  detail  by  itself ;  the  former 
is  the  preferred  method  when  you  have  an  assistant.  Some  audi- 
tors advocate  the  above  method  of  checking  all  the  general  ledger 
accounts,  but  that  is  not  necessary,  inasmuch  as  the  items  in  the 
general  ledger  accounts,  including  expense  and  capital  accounts, 
should  all  be  checked  against  the  books  of  original  entry,  and  this 
would  consequently  be  mere  duplication  of  work.  This  analysis, 
it  should  be  understood,  is  chiefly  for  purposes  of  comparison; 
the  audit  proper  is  accomplished  on  these  accounts,  as  well  as 
on  the  others,  by  first  verifying  the  correctness  of  the  items  in  the 
books  of  original  entry  and  then  checking  them  into  the  ledger. 


PRINCIPLES   AND   METHODS  21 

THE  CONTROLLING  ACCOUNT 

The  Controlling  Account  is  used  in  auditing  to  prove  up  the 
personal  accounts  by  totals  instead  of  checking  them  by  indi- 
vidual items.  (Where  it  is  practicable,  there  should  be  a  separ- 
ate controlling  account  for  the  personal  accounts  receivable, 
and  another  for  the  personal  accounts  payable;  but  where  the 
books  are  not  so  arranged  as  to  make  this  expedient,  it  will  be 
satisfactory  to  make  one  account  answer  for  both.)  Begin  with 
the  total  sum  in  the  personal  accounts  as  shown  by  the  trial  balance 
of  the  initial  date,  then  post  to  the  respective  sides  of  the  account 
the  monthly  footings,  during  the  period  under  audit,  of  such  books 
and  columns  as  are  posted  exclusively  to  personal  accounts. 
Should  there  be  any  book  in  use,  however,  that  is  not  columnized 
in  such  a  manner  as  to  keep  the  personal  account  items  separate 
from  those  relating  to  general  ledger  accounts,  the  personal 
account  items  from  that  particular  book  must  be  posted  indi- 
vidually to  the  controlling  account.  After  all  postings  have  been 
made  in  this  manner,  the  net  balance  of  the  controlling  account 
should  be  in  exact  agreement  with  the  total  of  this  class  of 
accounts  as  shown  by  the  trial  balance  of  the  terminating  date. 
If  found  so,  it  establishes  the  aggregate  accuracy  of  the  personal 
accounts. 

Now,  to  prove  their  individual  accuracy,  take  off  statements 
of  every  open  account  embraced  within  this  general  sum- 
mary, and  mail  them  yourself  to  the  various  debtors,  with  the 
request  that  they  check  them  over  and  return  them  to  you,  either 
endorsed  "Correct,"  or  with  notation  of  any  differences.  To  make 
these  statements  effective  they  should  be  an  exact  transcript  of 
the  face  of  the  ledger,  particularly  so  far  as  relates  to  credits  to 
customers;  and  the  various  classes  of  credits  should  be  desig- 
nated exactly  as  they  are  entered  upon  the  ledger,  i.  e.,  cash 
should  be  designated  "Cash"  and  other  credits  by  the  name  cred- 
ited upon  the  ledger.  This  form  of  making  up  the  statements  will 


22  RENN'S  PRACTICAL  AUDITING 

not  only  serve  to  prove  the  correctness  of  the  amount  of  the  ac- 
count, but  will  establish  quite  effectively  the  truth  of  the  compo- 
nent parts.  In  fact,  this  is  the  proper  method  for  determining 
whether  all  cash  receipts  from  customers  have  been  entered  upon 
the  cash  book,  provided  the  customary  precautions  are  also  taken 
against  allowing  improper  credits  in  this  class  of  accounts. 

You  may  also  attain  this  result  in  effect,  but  with  considerable 
less  labor,  by  carefully  checking  the  bookkeeper's  monthly  state- 
ments to  customers  with  the  ledger  accounts,  and  mailing  them 
yourself,  with  a  printed  slip,  requesting  each  customer  to  check 
them  over  and  return  to  you,  endorsed  either  "Correct"  or  with 
notation  of  any  differences. 

When  the  statements  sent  out  to  customers  for  comparison 
are  returned  to  you,  there  will  probably  be  exceptions  noted  on 
some  of  them,  but  your  judgment  will  guide  you  as  to  whether 
they  are  of  a  character  to  require  further  investigation  or  not. 
Among  a  large  number  of  accounts  an  occasional  difference  may 
exist  without  impropriety,  though  it  should,  of  course,  be  sus- 
ceptible of  explanation. 

On  books  of  account  where  the  sales  accounts  and  purchase 
accounts  are  not  kept  separately,  it  is  sufficient  for  practical 
purposes  to  treat  the  total  personal  account  debits  as  accounts 
receivable,  and  the  total  credits  of  the  same  class  as  accounts 
payable.  The  technical  distinction  need  not  be  drawn  except  in 
case  of  liquidation,  when  it  may  become  necessary  to  make  pre- 
cise separation. 

The  outline  of  an  audit  as  presented  in  this  manual  is  based 
upon  a  set  of  books  containing  separately  a  general  and  a  personal 
ledger,  the  contents  of  the  personal  ledger  being  represented  in 
the  general  ledger  by  a  controlling  account.  If  the  ledgers  are 
not  so  separated,  you  must  use  your  discretion  whether  it  will 
economize  time  and  labor  to  construct  a  controlling  account  inde- 
pendently, or  to  check  all  items  in  detail. 


PRINCIPLES  AND   METHODS 


23 


ILLUSTRATIONS  OF  CONTROLLING  ACCOUNTS 

ACCOUNTS  RECEIVABLE  CONTROLLING  ACCOUNT 


1907 
Jan'y 


Feb'y 


Balance,  Total  Accounts  Receivable 
per  Trial  Balance 


Sales  Book  Debits  January  S.B. 

Journal  "  J. 

Cash  Book       "          "  C.B. 

Sales  Book  Credits      "  (Returns)  S.B. 
Journal  "          "  J. 

Cash  Book       "          "  C.B. 


Balance., 


Proof :  Agreement  with  Personal 
Accounts  debit  balances 
on  Trial  Balance. 


$139  650  60 
72  450  62 


$  67  199  98 


$  85  376  45 


26072 
14053 


84594 

548623 

66  118  45 


$  7245062 


24 


RENN'S  PRACTICAL  AUDITING 


ILLUSTRATIONS  OF  CONTROLLING  ACCOUNTS 
ACCOUNTS  PAYABLE  CONTROLLING  ACCOUNT 


1907 
Jan'y 


Feb'y 


Balance,  Total  Accounts  Payable  per 
Trial  Balance.... 


Purchase  Book  Credits  January       P.B. 
Journal  J. 

Cash  Book  "  "  C.B. 

Purchase  Book  Debits      "(Retns.)P.B. 
Journal  "  "  J. 

Cash  Book  "  "  C.B. 


Balance.. 


Proof :  Agreement  with  Personal 
Accounts  credit  balances 
on  Trial  Balance. 


$  46  679  54 


14291 
15  410  20 
30  126  43 


$  59  162  76 
39  043  60 
1  536  23 
14011 


99  882  70 
46  679  54 


$  53  203  16 


PRINCIPLES   AND   METHODS 


25 


ILLUSTRATIONS  OF  CONTROLLING  ACCOUNTS 
COMBINED  ACC'TS  REC.  AND  ACC'TS  PAY.  CONTROLLING  ACC'T 

(Used  where  book*  of  original  entry  are  not  columnized  for  keeping  them  separately.) 


1907 

Jan'y 

1 
31 

Balance,    Net     amount    of    Personal 
Accounts  per  Trial  Balance  

15 

$  26 

52 

213 

872 

69 
90 

Sales  Book  Debits  January               S.B. 

31 

Purchase  Book  "       "      (Retns.)  P.B. 

12 

1 

142 

91 

31 

Journal             "                                   J. 

8 

16 

670 

92 

31 

Cash  Book       "        "                     C.B. 

10 

30 

266 

96 

31 

Sales  Book  Credits   "       (Retns.)  S.B. 

15 

845 

94 

31 

Purchase  Book"       "                     P.B. 

12 

39 

043 

60 

31 

Journal             "                                   J. 

8 

7 

022 

46 

31 

Cash  Book       "       "                     C.B. 

10 

66 

258 

56 

$127 

167 

38 

$113 

170 

56 

Feb'y 

1 

B  al  ance  „  

113 

170 
996 

56 
82 

— 

— 

$13 

Proof:     Total  Personal  Accounts 

debit   balances  on  Trial 

Balance. 

$  67 

199 

98 

Total  Personal  Accounts 

credit  balances  on  Trial 
Balance. 

53 

203 

16 

$  13 

996 

82 

If  one  or  more  of  the  personal 
accounts  contain  both  sales  and 
purchase  items,  the  respective 
sides  of  the  Trial  Balance  will 
produce  totals   differing  from 
the  above,  but  the  net  differ- 
ence   between   the    two   sides 
will  remain  the  same. 

26  RBNN'S  PRACTICAL  AUDITING 

AUDITOR'S  WORKING  SHEET 

The  form  of  Working  Sheet  illustrated  opposite  is  used  by 
auditors  for  classifying  the  trial  balance  into  the  various  schedules 
which  are  made  a  part  of  the  report;  such  as  the  Trading  Ac- 
count, Profit  &  Loss  Account,  etc.  It  serves  also  as  a  convenient 
medium  for  rating  Accounts  Receivable  as  "good,"  "doubtful," 
or  "bad." 

This  form  can,  of  course,  be  extended  to  any  desired  length 
by  using  wider  paper  and  adding  more  vertical  columns. 

When  taking  off  trial  balances  it  is  best  to  write  them  on  the 
working  sheet  form  in  the  first  instance,  and  thus  save  the  labor 
of  transcribing  them  afterwards. 


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28  RENN'S  PRACTICAL  AUDITING 

TURNOVER 

By  the  term  "turnover"  is  meant  the  cost  of  goods  sold  during 
a  certain  period. 

The  turnover  for  a  period  is  ascertained  in  the  following 
manner : 

Inventory,  January  1,  1905 $15,763.87 

Purchases  during  year  1905 46,143.22 


$61,907.09 
Deduct  Inventory,  December  31,  1905 13,376.04 


Turnover  $48,531.05 


PART  II 

PRACTICAL  AUDITING 

Description  in  complete  detail  of  the  method  of  conducting  a 
commercial  audit,  arranged  to  indicate  in  proper  order  the  suc- 
cessive steps  of  procedure,  and  concluding  with  an  auditor's  report 
made  out  in  standard  form. 

SPECIAL  INSTRUCTIONS 

For  the  sake  of  brevity  the  two  dates  limiting  the  period  under 
audit  will  be  referred  to  respectively  as  the  "initial  date"  and  the 
"terminating  date." 

Select  a  well  lighted  location  to  work  in,  and  reserve  to  your- 
self ample  space  for  handling  the  books  and  papers. 

In  a  suitable  note-book  make  memoranda,  as  you  proceed 
with  the  audit,  of  such  particulars  as  you  will  require  when  mak- 
ing up  your  report  after  the  audit  is  completed.  One  of  the  first 
points  to  set  down  is  a  complete  list  of  the  books  in  use,  giving 
their  titles,  and  where  the  titles  do  not  clearly  indicate  it,  their 
purposes  as  well,  together  with  the  names  of  the  clerks  who 
are  responsible  for  the  work  contained  in  the  individual  books. 

With  a  rubber  stamp,  bearing  the  word  "Audited"  above 
your  name,  stamp  conspicuously  all  loose  papers  of  a  fulfilled 
character  when  you  inspect  them ;  such  as  returned  bank  cheques, 
receipts,  invoices,  paid  notes,  pay-rolls,  and  other  vouchers.  This 

will  forestall  any  possibility  of  the  same  vouchers  being  foisted 
20 


30  RENN'S  PRACTICAL  AUDITING 

upon  you  a  second  time  in  support  of  disbursements.  However, 
it  is  not  permissible  to  stamp  securities  in  this  manner,  and  it  is 
therefore  necessary  to  observe  caution  when  inspecting  bills 
receivable,  stocks,  bonds,  mortgages,  and  securities  of  all  kinds, 
to  the  end  that  you  do  not  list  them  more  than  once. 

Adopt  a  personal  check-mark,  and  check  all  items  and  foot- 
ings (preferably  with  red  ink)  when  you  take  them  into  account 
during  the  audit. 

If  you  meet  with  an  erased  or  doubtful  item  in  any  of  the 
money  columns,  ascertain  what  it  should  be,  and  then  write  the 
correct  amount  above  it  in  red  ink.  This  will  detect  any  erasures 
or  alterations  which  may  be  made  after  you  have  audited  the 
items,  as  such  changed  items  will  not  bear  your  red  ink  iden- 
tification marks  when  you  review  the  books. 

Be  on  the  alert,  when  following  footings  from  page  to  page, 
to  see  that  they  are  properly  carried  forward,  both  as  to  the 
amounts  and  as  to  their  location  in  columns. 

Verify  all  footings  in  all  books  of  original  entry. 

All  books  of  original  entry  except  the  cash  book  should  be 
checked  into  the  general  ledger  or  the  Controlling  Account,  but 
the  cash  items  should  be  checked  from  the  general  ledger  or  the 
Controlling  Account  into  the  cash  book. 

Re-foot  all  personal  ledger  accounts  from  the  point  where 
last  ruled  up. 

Prove  all  footings  of  all  general  ledger  accounts,  balanced 
or  unbalanced,  during  the  entire  period  under  audit. 

Inspect  the  general  ledger  to  see  that  every  item  therein  has 
received  your  check-mark. 

In  case  you  find  errors  on  the  books  of  account,  make  mem- 
oranda of  the  same  upon  your  note-book,  but  do  not  make  cor- 
recting entries  upon  the  books  unless  you  are  authorized  to 
do  so. 


PRACTICAL  AUDITING  31 

A  general  principle  to  be  observed  in  auditing  is  to  guard 
against  improper  or  fictitious  credits  in  any  account  to  which 
cash  is  posted  on  either  side. 

ORDER  OF  PROCEDURE 

The  following  order  of  procedure  for  making  an  ordinary 
commercial  audit  will  economize  time  and  accomplish  the  best 
results;  but,  when  conditions  make  it  impracticable  to  follow 
these  directions  exactly,  you  must  accommodate  yourself  to  cir- 
cumstances. 

It  will  be  observed  that  this  outline  of  an  audit  is  classified 
to  accord  with  the  basic  books  which  make  up  a  typical  set  of 
books  of  account.  There  are  establishments,  however,  where 
some  of  these  principal  books  radiate  into  special  or  auxiliary 
books;  in  such  cases  the  same  methods  of  auditing  will  apply 
to  the  auxiliary  books  as  would  be  employed  on  the  particular 
class  of  items  contained  in  them,  were  those  items  entered  upon 
the  main  books  of  account. 

THE  CASH  BALANCE 

Where  the  engagement  to  make  the  audit  is  entered  into 
some  time  in  advance  of  the  terminating  date,  it  is  altogether 
the  best  plan  to  deposit  in  bank  all  funds  on  hand  at  the  close 
of  the  last  day,  in  order  that  the  bank  account  shall  constitute 
the  entire  cash  balance  of  that  date.  The  bank  pass-book  should 
then  be  written  up,  and  reconciled  immediately  with  your  client's 
books. 

If  the  above  method  is  not  deemed  feasible,  however,  the  next 
best  plan  is  for  the  auditor  himself  to  balance  the  cash  on  the 
night  of  the  terminating  date,  and  at  that  time  to  assure  him- 
self that  the  proper  amount  in  some  form  or  other  is  at  hand  to 
substantiate  the  book  balance.  As  a  part  of  this  method,  he 
should  get  the  bank  pass-book  written  up  not  later  than  the  day 


32  RENN'S  PRACTICAL  AUDITING 

following,  and  should  make  reconciliation  with  the  bank  imme- 
diately on  the  return  of  the  pass-book. 

If  you  begin  the  audit  some  time  after  the  terminating  date, 
without  having  previously  balanced  the  cash,  as  directed  here- 
tofore, the  proper  course  is  to  balance  when  entering  upon  your 
work. 

First,  count  the  actual  currency  on  hand  and  list  same,  then 
add  any  memoranda  that  may  be  carried  as  currency.  Inquire 
into  the  authority  for  all  advances  represented  by  these  mem- 
oranda. (By  thus  listing  the  currency  in  advance  of  balancing 
the  bank  account,  you  will  avoid  the  risk  of  currency  having  been 
replenished  through  a  cheque  not  recorded.) 

Second,  list  cheques  on  hand,  after  having  assured  yourself 
that  they  are  entered  upon  the  cash  book  prior  to  the  point  where 
balanced. 

Add  to  the  above  items  the  balance  in  bank,  as  shown  by 
cheque  book  or  wherever  recorded. 

The  sum  of  the  foregoing  three  items  should  equal  the  cash 
balance,  of  which  a  summary  should  be  incorporated  in  your 
report. 

To  arrive  at  the  cash  book  balance,  you  should  verify  care- 
fully the  footings  of  that  book  from  the  terminating  date  to  the 
present,  confirming  the  final  footings  in  red  ink,  and  with  your 
check-mark.  Compare  the  result  with  your  summary  of  actual 
cash,  previously  made. 

The  disbursement  side  of  this  intervening  period  should  be 
audited  later  in  precisely  the  same  manner  as  you  test  the  space 
under  direct  review,  namely,  with  returned  bank  cheques;  and 
where  the  distribution  is  made  direct  upon  the  face  of  the  cash 
book,  with  vouchers  or  other  competent  memoranda. 

As  the  receipts  side  for  this  additional  period  is  not  held 
in  check  by  the  Controlling  Account,  it  is  necessary  that  you 
apply  special  methods  to  its  test  when  making  the  audit. 


PRACTICAL   AUDITING  33 

After  seeing  to  it  that  all  cash  sales  have  been  entered  up  to 
date  for  this  extra  period,  it  is  best  to  prove  the  face  of  the 
book  by  the  inverse  process  of  checking  into  the  cash  book  by 
individual  items  the  deposits  made  in  bank  during  this  time; 
and  in  similar  manner  follow  into  the  book  from  their  place  of 
record  such  other  items  as  should  appear  upon  the  receipts  side 
of  the  cash  book;  namely,  cheques  on  hand  and  currency  dis- 
bursed or  remaining  on  hand. 

Sometimes  you  may  meet  with  the  condition  that  the  cash 
balance  of  a  certain  date  is  not  recorded.  To  determine  what 
it  was  at  that  time,  add  to  the  present  balance  the  total  disburse- 
ments made  since  the  date  in  question,  and  deduct  the  total 
receipts  during  the  interval — the  net  difference  is  the  balance 
sought 

THE  BANK  BALANCE 

As  soon  as  possible  after  balancing  the  cash  you  should  get 
the  bank  pass-book  written  up,  and  when  returned  to  you  recon- 
cile it  with  your  client's  account  by  deducting  the  outstanding 
cheques  from  the  balance  shown  by  bank  statement.  The  best 
way  to  accomplish  this  is  to  arrange  the  returned  bank  cheques  in 
numerical  order,  and  then  from  the  missing  numbers  construct 
the  schedule  of  uncleared  cheques.  Also  see  whether  the  re- 
turned cheques  are  properly  endorsed  by  the  payee,  and  stamped 
by  the  bank  as  having  been  paid. 

The  bank  balance  should  be  stated  on  the  balance  sheet  at  the 
net  amount  shown  by  your  client's  books,  provided  reconcilement 
has  proven  it  to  be  correct.  The  suggestion  at  one  time  made 
that  it  should  be  stated  "gross"  with  an  offsetting  liability  to 
cover  the  outstanding  cheques,  does  not  merit  any  consideration. 

TRIAL  BALANCES 

After  you  have  verified  the  cash  and  bank  balances  as  directed, 
the  next  step  in  point  of  importance  is  to  secure  trial  balances  of 


34  RENN'S  PRACTICAL  AUDITING 

the  ledgers.  This  will  serve  the  double  purpose  of  familiarizing 
you  with  the  system  of  accounting  in  use  as  indicated  by  the 
lay-out  of  the  accounts,  and  will  also  provide  you  with  an  indis- 
putable abstract  of  the  ledgers  as  they  stood  at  the  date  of  the 
trial  balances.  Should  any  alterations  be  made  subsequently  in 
the  ledgers  the  abstract  in  your  possession  will  direct  attention 
to  the  change. 

If  trial  balances  of  the  initial  date  and  of  the  terminating  date 
are  at  hand,  you  can  make  use  of  them  for  present  purposes  as 
you  find  them;  but,  where  they  are  not  at  hand,  it  will  now  be 
necessary  to  take  off  balances  of  both  dates  limiting  the  period 
under  audit.  These  should  be  set  down  (preferably)  on  the 
working  sheet  form  of  trial  balance  paper,  illustrated  in  Part  I. 

For  the  purpose  of  verifying  the  personal  accounts  receiv- 
able, as  described  in  the  article  on  the  Controlling  Account,  mail 
statements  of  their  accounts  to  all  debtors  shown  upon  the  trial 
balance  of  the  terminating  date. 

Dispatching  these  statements  at  this  time  will  give  oppor- 
tunity for  their  return  during  the  progress  of  the  audit. 

As  rapidly  as  these  statements  are  returned  they  should  be 
checked  against  the  trial  balance;  delinquents  should  be  urged 
to  return  them  until  the  last  one  possible  is  received. 

To  verify  accounts  payable,  the  proper  course  is  to  procure 
statements  from  all  parties  with  whom  your  client  is  known  to  do 
business,  and  compare  them  with  the  accounts  upon  the  books. 

From  the  trial  balance  of  the  initial  date  determine  the  aggre- 
gate amount  of  personal  accounts  of  that  time,  and  with  that 
amount  as  a  basis  open  the  Controlling  Account,  which  is  to  be 
conducted  as  described  under  that  heading  in  Part  I. 

BILLS  RECEIVABLE  AND  SECURITIES 

The  examination  of  Bills  Receivable  should  now  be  taken  up, 
and  it  may  be  stated  that  this  detail  demands  a  great  deal  more 
thoroughness  than  it  usually  receives. 


PRACTICAL  AUDITING  35 

The  substitution  of  fictitious  bills  receivable  to  offset  money 
embezzled  is  a  favorite  method  of  concealing  a  shortage  tem- 
porarily; for  notes  are  not  subjected  to  the  frequent  scrutiny 
which  open  accounts  receive. 

In  several  recent  instances  the  officers  of  certain  financial  in- 
stitutions made  use  of  this  expedient  to  cover  up  the  shortage, 
while  they  were  industriously  looting  the  banks  under  their 
charge,  so  that  when  the  defalcations  were  finally  exposed,  they 
had  attained  astounding  proportions.  This  scheme  may  be  pur- 
sued with  equal  facility  in  a  commercial  house,  although  neces- 
sarily to  a  smaller  extent. 

A  simple  method,  and  the  only  safe  one,  to  follow  in  auditing 
bills  receivable  is  to  communicate  with  the  reputed  drawers  of 
the  notes,  in  the  same  manner  as  has  been  indicated  for  the 
verification  of  open  accounts  receivable,  and  so  secure  direct 
acknowledgment  that  the  notes  are  genuine.  A  note  once  verified 
as  above  may  be  passed  on  future  audits  until  due,  as  reference  to 
your  records  will  show  that  it  has  been  proved  genuine. 

Attention  is  to  be  given  to  the  maturing  dates  of  the  notes, 
and  whether  they  are  secured.  If  any  unsecured  notes  are  found 
to  be  past  due  they  should  be  charged  back  to  the  open  accounts 
of  the  debtors. 

Notes  at  banks  for  collection  or  under  re-discount  should  be 
verified  by  the  auditor.  A  certified  list  of  notes  in  their  pos- 
session will  be  furnished  by  banks  on  proper  request. 

Draw  up  a  schedule  of  the  notes,  showing  their  essential 
points  in  detail. 

Securities  in  the  shape  of  stocks  or  bonds  are  also  to  be 
examined  rigidly,  as  there  are  instances  on  record  where  the 
number  of  shares  represented  by  stock  certificates  had  been 
raised.  A  separate  schedule  should  be  drawn  up  for  this  class  of 
securities. 

From  now  on  you  should  audit  the  individual  books  in  the 
following  order,  and  make  it  a  point  to  complete  at  one  time 


36  RENN'S  PRACTICAL  AUDITING 

every  feature  of  the  audit  relating  to  each  particular  book,  in- 
cluding verification  of  footings.  If  possible,  do  not  allow  any 
book  to  pass  out  of  your  possession  while  it  is  under  inspection. 

THE  CASH  BOOK 

RECEIPTS  SIDE 

The  importance  of  auditing  the  cash  book  thoroughly  cannot 
be  overestimated.  As  stated  before,  the  chief  object  in  falsifying 
books  of  account  is  to  abstract  cash,  and  the  attempt  to  manipulate 
the  records  for  that  purpose  is  frequently  made  in  the  cash  book, 
either  by  omitting  to  enter  receipts,  or  by  direct  falsification — 
such  as  overfooting  the  disbursement  side  or  underfooting  the 
receipts  side,  or  by  the  entry  of  fabricated  disbursements. 

The  cash  book  is  really  a  personal  account  between  the  pro- 
prietor of  a  business  and  his  cashier,  the  cashier  charging  him- 
self with  the  amount  of  cash  on  hand  at  a  certain  date,  to  which 
he  adds  from  day  to  day  the  cash  received  into  the  business 
from  all  sources.  In  turn  the  cashier  takes  credit  for  all  moneys 
paid  out  on  behalf  of  the  business,  and  holds  himself  accountable 
to  the  proprietor  for  the  difference  as  shown  by  the  cash  book. 

It  will  be  seen  readily  that  it  is  not  sufficient  for  a  customer's 
remittance  to  appear  merely  in  his  account  in  the  ledger,  but  it  is 
equally  important  that  the  cashier  as  custodian  should  have 
charged  himself  with  the  amount.  For  that  reason  the  author 
suggests  that  all  items  which  appear  in  the  ledger  as  "cash"  should 
be  checked  from  there  into  the  cash  book,  since  that  will  prove 
that  they  have  been  treated  as  "cash"  and  must  be  accounted  for. 
By  thus  making  this  detail  different  from  routine  checking, 
there  is  less  likelihood  of  falling  into  error  through  inattention. 

In  an  extensive  business,  however,  it  would  be  practically  im- 
possible to  check  all  cash  items  individually,  so  this  difficulty  has 
been  met  by  introducing  the  Controlling  Account,  through  which 
the  total  credited  to  personal  accounts  during  the  month  is 


PRACTICAL  AUDITING  37 

checked  in  one  item.  A  study  of  the  controlling  account,  as 
described  in  Part  I  of  this  manual,  will  make  clear  that  it  is  quite 
as  reliable  as  individual  checking. 

The  cash  items  in  the  general  ledger,  however,  should  be 
checked  individually  into  the  cash  book,  because  they  are  not  held 
in  check  by  the  controlling  account.  Falsification  in  footings 
and  the  entry  of  fabricated  disbursements  are  fully  provided  for 
in  the  directions  which  follow: 

Verify  footings  for  the  entire  period  under  audit. 

Check  the  cash  book  balance  of  the  initial  date  against  cash 
balance  in  ledger. 

Check  cash  sales  from  their  place  of  record  into  the  cash 
book. 

Several  satisfactory  methods  for  recording  cash  sales  may  be 
mentioned,  such  as  modern  cash  registers  (the  inside  record  of 
which  should  be  under  the  auditor's  exclusive  control),  or  dupli- 
cate cash  sales  tickets,  numbered  consecutively,  any  missing  num- 
bers of  which  are  to  be  accounted  for  to  the  auditor.  When 
other  methods  are  used,  you  should  test  their  efficiency  and,  if 
deemed  unsatisfactory,  recommend  improvements. 

If  there  are  any  other  cash  receipts  of  an  impersonal  charac- 
ter, similar  to  cash  sales  but  still  differing  in  some  respect  so  that 
they  cannot  logically  be  included  with  them,  such  as  sale  of  old 
material,  etc.,  they  should  be  tested  with  such  records  of  the 
transactions  as  may  be  obtainable. 

Cash  discounts,  if  entered  upon  the  cash  book,  are  not  easily 
verifiable,  but  they  should  be  scrutinized  to  see  that  they  are  not 
excessive.  Occasional  items  at  different  periods  of  the  time 
under  audit  should  be  compared  with  remittance  letters  to  test 
their  individual  correctness,  and  if  they  are  found  satisfactory 
they  may  be  accepted  as  implying  the  general  correctness  of  this 
class  of  items. 

Where  miscellaneous  credits  are  made  through  the  cash  book 
to  customers,  for  such  items  as  allowances,  freights,  etc.,  if 

81831 


38  RENN'S  PRACTICAL  AUDITING 

made  separately  they  should  be  subjected  to  the  same  scrutiny 
as  they  would  receive  were  they  entered  in  the  journals,  where 
they  properly  belong.  Should  they  be  included,  however,  in  the 
same  item  with  the  cash,  they  should  be  put  to  the  most  rigid 
test.  You  should  procure  copies  from  the  bank  of  the  deposits 
made  for  your  client  during  the  period  under  audit,  and  from 
them  determine  the  actual  cash  portion  of  these  sundry  credits. 
In  cases  where  currency  payments  are  entered  in  this  way  the 
amount  of  actual  cash  would  have  to  be  determined  by  deducting 
the  offsetting  charge  from  the  total  credit.  Fortunately  this  is  a 
condition  not  frequently  met  with,  and  when  encountered  should 
be  condemned. 

Compare  the  deposits  made  during  the  last  ten  days  preced- 
ing the  terminating  date  with  the  entries  in  the  cash  book. 

From  the  general  ledger  check  all  cash  credits  into  the  cash 
book,  including  columnar  footings ;  and  then  make  sure  by  inspec- 
tion that  all  of  this  class  of  items  have  now  been  checked  on  the 
receipts  side  of  the  cash  book. 

Post  monthly  footings  of  the  personal  accounts  column  to 
Controlling  Account. 

THE  CASH  BOOK 

DISBURSEMENT   SIDE 

Verify  footings  for  the  entire  period  under  audit. 

Check  the  returned  bank  cheques  against  the  items  on  this  side 
of  cash  book,  noting  at  the  same  time  whether  they  are  entered  as 
•drawn  in  respect  to  name  of  payee  and  amount.  Stamp  the 
cheques  "Audited." 

Check  the  list  of  outstanding  cheques  from  bank  reconcile- 
ment against  the  items  on  cash  book  representing  them,  and 
prove  them  with  the  vouchers,  where  such  have  been  returned, 
otherwise  with  the  invoices.  If  any  of  these  items  represent  pur- 
chases of  securities,  the  same  should  be  inspected;  if  charged  to 
personal  accounts  as  loans  or  advances,  investigate. 


PRACTICAL  AUDITING  39 

There  should  be  vouchers  ready  at  hand  in  support  of  all  cur- 
rency disbursements,  since  no  cash  should  have  been  paid  out 
in  this  form  without  taking  a  receipt  at  first  hand.  With  these 
vouchers  verify  all  items  of  this  character. 

The  foregoing  should  clear  this  side  of  the  cash  book,  except- 
ing possibly  the  petty  expenditure  voucher,  pay-rolls,  and  notes 
taken  up  at  banks,  or  interest  on  the  same.  These  items  are 
frequently  paid  without  drawing  individual  cheques  for  them;  in 
such  cases  the  original  papers  must  be  taken  as  evidence. 

It  should  be  recommended,  however,  that  specific  cheques 
be  drawn  in  future  for  all  classes  of  disbursements.  The  proper 
way  to  do  this  in  regard  to  petty  expenditures,  is  to  draw  a  cheque 
in  favor  of  the  disbursing  official  for  a  round  sum  as  a  begin- 
ning, and  thereafter  reimburse  him  by  cheque  periodically  for  the 
amount  of  his  expenditure  voucher.  This  will  leave  the  original 
amount  in  his  possession,  while  at  the  same  time  covering  his 
expenditures  by  cheque. 

This  brings  you  to  the  cash  balance,  which  has  been  proven 
up  before. 

You  have  now  established  the  fact  of  the  disbursements  re- 
corded upon  the  cash  book,  but  it  remains  to  determine  the  pur- 
poses for  which  they  were  made. 

Where  the  charges  for  moneys  paid  out  are  made  upon  the 
cash  book  direct  to  the  various  accounts,  you  should  require 
vouchers  with  invoices  attached,  in  order  to  check  all  items 
entered  against  impersonal  accounts,  and  these  vouchers  should  be 
certified  "Correct"  by  some  one  of  competent  authority.  Other- 
wise you  should  examine  the  invoices  to  see  that  they  are  of  a 
date  harmonizing  with  the  time  of  payment,  that  they  are  properly 
made  out  to  your  client  and  that  the  amounts  are  correct;  or  at 
least  that  they  have  been  so  attested  by  some  authorized  person. 
Charges  to  personal  accounts  should  likewise  be  checked  with 
vouchers  which  satisfactorily  explain  the  purpose  of  the  pay- 
ments. 


40  RENN'S  PRACTICAL  AUDITING 

V 

Pay-rolls  charged  up  should  bear  the  O.  K.  of  some  one  in 
authority,  as  well  as  the  signatures  of  the  employes  to  whom 
paid.  If  not  so  attested,  satisfy  yourself  as  to  their  general  cor- 
rectness, and  recommend  this  safeguard.  If  footings  are  not 
certified,  they  should  be  verified  by  the  auditor. 

Charges  to  Bills  Payable  account  for  notes  taken  up  at  the 
bank  or  elsewhere  should  be  substantiated  by  the  canceled  note 
itself  in  each  instance,  which  should  be  examined  as  to  date  and 
genuineness ;  instances  are  known  where  the  same  note  has  been 
charged  up  more  than  once. 

Petty  Cash  disbursements  should  be  combined  in  one  monthly 
voucher,  properly  attested  O.  K.  by  some  responsible  official.  If 
you  are  asked  to  accept  the  face  of  a  petty  cash  book  as  a  voucher 
for  this  class  of  disbursements,  you  should  require  an  authorized 
O.  K.  to  be  placed  upon  the  book. 

Stamp  all  of  the  foregoing  vouchers  "Audited"  when  taken 
into  account. 

Review  the  cash  book  to  assure  yourself  that  you  have  had 
vouchers  for  all  disbursements. 

Having  thus  satisfied  yourself  that  the  money  was  paid  out 
as  recorded,  and  also  that  it  was  disbursed  for  proper  purposes,  it 
remains  only  to  make  comparisons  with  the  ledgers. 

From  the  general  ledger  check  all  items  posted  from  this  side 
of  the  cash  book,  including  cash  balance  and  monthly  footings 
of  columnar  postings;  then  make  sure  that  this  has  checked  all 
charges  excepting  the  debits  to  personal  accounts,  which  are 
covered  by  the  controlling  account. 

Post  monthly  footings  of  the  personal  accounts  columns  to 
Controlling  Account. 

Analyze  the  items  which  are  entered  in  the  columns  that  are 
charged  in  total  to  the  respective  accounts.  This  is  particularly 
important  in  connection  with  the  cash  book,  as  it  will  betray  im- 
proper distribution,  if  such  have  been  made  accidentally  or  other- 
wise. 


PRACTICAL  AUDITING  41 

% 

In  establishments  where  the  Voucher  System  is  a  part  of  the 
scheme  of  accounting,  the  distribution  of  disbursements  is  made 
in  advance  upon  the  Voucher  Register  at  the  time  when  the 
vouchers  are  issued,  instead  of  being  made  upon  the  cash  book 
when  they  are  paid,  as  heretofore  described.  Under  this  arrange- 
ment all  disbursements  are  charged  to  Accounts  Payable  upon 
the  cash  book,  as  an  offset  to  the  corresponding  credits  previously 
made  to  the  same  account  upon  the  Voucher  Register. 

In  such  a  case  the  audit  of  the  disbursement  side  of  the  cash 
book  has  been  completed  practically  at  the  point  where  it  is  indi- 
cated that  the  fact  of  the  disbursements  has  been  established.  The 
following  details,  however,  should  be  added: 

Check  the  items  from  the  Accounts  Payable  column  in  the 
cash  book  into  the  corresponding  column  in  the  Voucher  Reg- 
ister, in  order  to  determine  by  the  amounts  remaining  unchecked 
and,  therefore,  unpaid,  the  correctness  of  the  balance  of  Accounts 
Payable  account. 

Check  monthly  footings  of  the  Accounts  Payable  column,  as 
well  as  the  final  cash  balance,  into  the  general  ledger. 

If,  in  conjunction  with  the  use  of  the  voucher  system,  there 
are  any  charges  made  in  the  cash  book  to  other  than  Accounts 
Payable  account,  check  them  in  the  manner  described  heretofore 
for  vouching  items  direct  into  the  cash  book. 

THE  VOUCHER  REGISTER 

CREDITING   SIDE 

These  directions  for  auditing  the  Voucher  Register  are  based 
upon  the  system,  so  generally  in  use,  by  which  the  vouchers,  with 
papers  attached,  are  sent  out  with  the  remittances,  to  be  receipted 
and  then  returned.  Where  the  more  up-to-date  method  of  issuing 
both  an  office  voucher  and  a  voucher-cheque  is  in  force,  most 
of  the  complications  provided  for  in  this  article  are  obviated; 


42  RENN'S  PRACTICAL  AUDITING 

especially  the  matter  of  paid  vouchers  not  having  been  returned 
is  eliminated  entirely. 

Verify  footings  for  the  entire  period  under  audit. 

In  following  these  directions  you  have  already  checked  the 
paid  items  from  the  cash  book  into  the  Accounts  Payable  column 
in  the  Voucher  Register.  Now  make  a  schedule  of  the  unpaid 
vouchers  as  shown  by  the  unchecked  items,  and  compare  the  total 
with  the  balance  of  Accounts  Payable  account  in  the  ledger. 

Check  the  returned  vouchers  against  the  items  which  are 
shown  "paid"  on  this  side  of  the  Voucher  Register,  to  determine 
what  vouchers  (if  any)  are  missing.  To  avoid  unnecessary 
handling  of  vouchers,  the  examination  of  them  and  comparison 
with  the  distribution  side  of  the  Voucher  Register,  stipulated  for 
below,  may  all  be  made  at  this  time. 

Check  the  total  of  Accounts  Payable  column  to  its  proper 
account  in  the  ledger. 

Check  other  general  ledger  items  (if  any)  into  the  ledger. 

Post  footings  of  the  personal  ledger  column  (if  any)  to  Con- 
trolling Account. 

THE  VOUCHER  REGISTER 

DEBITING  SIDE 

Under  the  voucher  system  for  paying  accounts  the  Voucher 
Register  supplants  the  right-hand  side  of  the  cash  book,  so  far  as 
relates  to  the  distribution  of  charges  and  the  entry  of  details. 

The  examination  of  vouchers  and  the  mode  of  checking  them 
into  the  debiting  side  of  the  Voucher  Register  is  therefore  iden- 
tical with  the  method  already  indicated  for  handling  them  when 
they  have  been  entered  in  the  cash  book. 

Verify  footings  for  the  entire  period  under  audit. 

It  is  stated  above  that  the  examination  of  returned  vouchers 
and  their  comparison  with  this  side  of  the  Voucher  Register 
might  as  well  be  made  at  the  time  when  they  are  being  checked 


PRACTICAL  AUDITING  43 

against  the  crediting  side  of  this  book.  This  examination  involves 
inspection  to  determine  whether  they  are  properly  O.  K.'d,  and 
whether  they  have  invoices  attached  or  on  file  to  substantiate  the 
charges  made  from  them  upon  this  side  of  the  Voucher  Register, 
and  it  should  be  noted  particularly  whether  the  charges  are  prop- 
erly distributed.  Vouchers  that  have  been  issued,  but  rem?in 
unpaid,  should  be  compared  in  the  same  manner  with  the  entries 
in  the  Voucher  Register. 

This  should  clear  the  debiting  side  of  this  book,  except  such 
items  as  are  covered  by  vouchers  paid  but  not  returned ;  for  such 
items  the  returned  bank  cheque  is  usually  deemed  a  satisfactory 
voucher,  unless  the  nature  of  the  distribution  should  seem  to 
require  corroboration. 

Make  a  list  of  these  missing  vouchers  for  your  report. 

Stamp  the  vouchers  and  attached  invoices  "Audited"  at  the 
time  when  they  are  compared  with  the  entries  upon  the  Voucher 
Register. 

Check  the  general  ledger  items  and  columnar  footings  into 
the  general  ledger. 

Post  footings  of  the  personal  ledger  column  to  Controlling 
Account. 

Analyze  columns  which  are  posted  in  total  to  any  expense  or 
capital  account. 

THE  PURCHASE  BOOK 

The  distinctive  Purchase  Book  is  often  dispensed  with  en- 
tirely where  a  Voucher  Register  is  used,  as  all  purchases  are 
vouchered  at  first  hand  by  that  system.  In  other  establishments, 
however,  while  the  Purchase  Book  is  used,  it  is  limited  to  the 
entry  of  purchases  of  the  commodities  dealt  in,  and  there  may  be 
still  other  conditions  found  that  will  further  modify  this  arrange- 
ment ;  but  the  principle  of  auditing  the  purchases  of  the  stock-in- 
trade,  wherever  recorded,  remains  the  same. 

Verify  footings  for  the  entire  period  under  audit. 


44  RENN'S  PRACTICAL  AUDITING 

Check  all  entries  of  purchases  with  the  original  invoices,  which 
should  be  examined  in  regard  to  details  of  date,  both  month  and 
year;  see  that  they  are  properly  made  out  to  your  client ;  and  that 
they  are  certified  by  the  manager  or  an  authorized  employe  in 
respect  to  receipt  of  goods,  and  correctness  of  price  and  exten- 
sions. 

Stamp  the  invoices  "Audited"  at  the  time  when  they  are  com- 
pared with  the  entries. 

Purchases  made  for  officials  or  employes  should  be  traced  to 
their  respective  accounts. 

If  the  charges  for  goods  returned  to  shippers  are  entered 
upon  this  book,  check  the  shipping  clerk's  record  of  same  against 
the  entries. 

Check  footings  into  the  proper  ledger  account. 

Post  footings  to  the  Controlling  Account. 

THE  SALES  BOOK 

Verify  footings  for  the  entire  period  under  audit. 

For  an  audit  of  the  character  described  here  you  may  accept 
the  total-extension  of  individual  invoices  as  the  basis  from  which 
to  take  sales  into  account,  the  assumption  being  that  they  were 
properly  checked  before  they  were  entered  in  the  books. 

Where  there  are  numerous  sales  books  in  use,  it  may  be  found 
that  the  sales  are  transferred  to  a  sales  journal  from  which  the 
postings  are  made  to  the  ledger.  In  such  a  case  it  is  optional 
whether  you  check  the  sales  into  the  journal,  or  post  the  totals 
direct  from  the  book  of  original  entry  into  the  Controlling 
Account;  the  last  named  is  the  more  desirable  method,  where 
practicable,  as  thereby  you  will  be  taking  original  figures. 

Should  credits  for  merchandise  returned  be  entered  in  this 
book,  call  for  authorized  credit  slips,  or  similar  vouchers,  with 
which  to  check  the  entries. 


PRACTICAL   AUDITING  45 

Stamp  the  credit  slips  "Audited"  when  compared  with  the 
entries. 

Check  footings  into  the  general  ledger. 
Post  footings  to  the  Controlling  Account. 

THE  JOURNAL 

Verify  footings  for  the  entire  period  under  audit. 

In  auditing  the  journal  a  cardinal  rule,  previously  stated,  is 
to  see  that  no  fictitious  credits  are  allowed  to  stand  in  any  ac- 
count to  which  cash  is  posted  on  either  side.  As  has  already  been 
stated  elsewhere,  nearly  all  falsifications  are  made  with  the  ulti- 
mate object  of  diverting  cash,  therefore  this  single  rule,  if  fol- 
lowed, will  in  itself  accomplish  a  large  part  of  the  object  of  the 
audit. 

This  applies  equally  to  all  books  of  account;  but  it  is  here 
emphasized  for  the  reason  that  the  journal,  with  its  various  auxil- 
iaries, affords  the  best  opportunity  to  falsify,  and  in  consequence 
this  book  is  usually  favored  with  those  entries,  if  any  such  are 
made. 

The  larger  establishments  use  journal  vouchers  from  which 
entries  are  made  upon  the  journal.  By  this  system  an  individual 
voucher  for  each  entry  is  drawn,  which  recites  the  details  of  the 
transaction  and  is  then  certified  with  an  authorized  O.  K. ;  after 
which  it  is  journalized.  This  facilitates  greatly  the  auditing  of  the 
journal,  as  it  is  then  necessary  only  to  check  these  vouchers  against 
the  entries  in  order  to  establish  their  correctness ;  except  in  cases 
of  extraordinary  entries,  when  independent  investigation  should 
be  made. 

Where  the  journal  entries  are  made  haphazard,  however, 
.without  regard  to  any  particular  system — as  is  often  the  case — 
the  inspection  of  the  journal  becomes  a  much  more  complicated 
matter.  To  verify  the  entries  item  by  item  would  involve  an 
amount  of  labor  which  would  make  auditing  entirely  too  expen- 
sive. For  an  audit  such  as  is  here  described  the  necessity  for 


46  RENN'S  PRACTICAL  AUDITING 

detailed  inspection  may  be  overcome  by  having  some  authorized 
official  initial  the  individual  pages  of  the  journal  as  evidence  that 
he  assumes  responsibility  for  the  entries. 

While  accepting  such  a  general  O.  K.  in  the  main,  you  should 
still  verify  entries  so  far  as  possible  with  such  data  or  mem- 
oranda as  may  be  at  hand,  noting  particularly  whether  entries  for 
purchases  of  every  kind  are  supported  by  invoices,  and  whether 
the  purchases  were  really  made  for  your  client. 

All  such  invoices  and  memoranda  should  be  stamped  "Audit- 
ed" at  the  time  when  they  are  checked  against  the  entries. 

By  thus  checking  a  portion  of  the  entries,  those  remaining 
unchecked  will  be  brought  more  conspicuously  to  your  notice 
when  reviewing  the  book,  and  any  unusual  or  exceptional  items 
thus  discovered  should  then  be  investigated. 

It  should  be  noted  in  this  connection  that,  where  credits  to 
customers  have  been  made  without  a  definite  O.  K.,  the  receipt 
side  of  the  cash  book  should  be  vouched  by  checking  the  deposit 
slips  of  the  period  under  audit,  against  this  side  of  the  cash 
book. 

Analyze  columnar  charges  made  to  expense  or  capital  accounts. 

Check  general  ledger  items,  and  the  footings  of  columns  that 
are  posted  in  totals,  into  the  general  ledger. 

Post  footings  of  the  personal  ledger  columns  into  Controlling 
Account. 

REVIEW  AND  CONCLUSION  OF  THE  AUDIT 

After  you  have  inspected  all  the  books  of  original  entry  pro- 
ceed to  examine  the  ledgers. 

Inspect  the  personal  ledger  trial  balance  to  determine  whether 
all  the  debtors'  accounts  have  been  pronounced  "Correct,"  through 
the  statements  previously  sent  out,  or  that  differences  (if  any) 
have  been  reconciled. 

That  all  liabilities,  as  determined  by  the  statements  requested 
from  trade  creditors,  appear  upon  the  books. 


PRACTICAL  AUDITING  47 

That  the  total  of  the  personal  ledger  trial  balance  agrees  with 
the  independent  Controlling  Account  which  you  have  kept 
throughout  the  audit;  and  that  the  Controlling  Account  (if  one  is 
kept)  upon  the  general  ledger,  in  turn,  agrees  with  yours. 

If  some  detail  of  the  instructions  heretofore  given  has  been 
disregarded,  as  is  sometimes  done,  it  may  result  that  there  is  now 
no  positive  proof  of  the  correctness  of  the  personal  ledger  trial 
balance.  In  such  a  case  it  is  necessary  to  foot  all  open  personal 
accounts  upon  the  ledger  from  the  point  where  they  were  last 
ruled  off,  and  in  that  manner  confirm  the  balances  shown  upon 
the  trial  balance. 

It  will  be  found,  however,  that  where  the  foregoing  instruc- 
tions have  been  followed  exactly  throughout,  and  where  no  errors 
have  been  found  in  the  books  of  original  entry,  nor  developed 
through  the  medium  of  the  statements  sent  out  or  received,  that 
the  personal  ledger  trial  balance  as  originally  taken  will  stand 
confirmed  without  re-footing  the  accounts. 

For  the  purpose  of  assisting  you  in  rating  accounts  receivable 
as  "good,"  "doubtful,"  or  "bad,"  you  should  review  the  trial 
balance  in  company  with  the  credit  man  of  the  establishment,  and 
be  governed  by  his  suggestions  if  they  seem  reasonable  to  you. 

The  general  ledger  is  now  to  be  re-footed  for  the  entire  period 
under  audit,  whether  accounts  are  ruled  up  or  remain  open,  and 
note  is  to  be  taken  at  the  same  time  whether  all  items  within  that 
period  bear  your  check  mark.  Following  the  inspection  of  each 
account,  the  net  balance  of  the  same  is  to  be  checked  against  the 
trial  balance. 

Compare  your  analysis  sheets  of  the  various  expense  and 
capital  accounts  with  the  totals  of  each  of  these  accounts  upon 
the  ledger,  and  make  sure  at  the  same  time  that  no  error  has 
been  made  in  the  distribution  of  charges. 

From  the  trial  balance,  verified  as  above,  draw  up  the  Profit 
and  Loss  Statement  and  the  Balance  Sheet. 


48  RENN'S  PRACTICAL  AUDITING 

THE  PROFIT  AND  LOSS  ACCOUNT 

Properly  the  Profit  and  Loss  account  should  be  used  merely 
to  receive  the  transfer  of  the  yearly  balances  of  the  various  reve- 
nue accounts,  to  show  compactly  the  result  of  the  year's  business. 
If  the  account  is  restricted  to  the  use  stated  above,  it  follows  that 
the  items  brought  over  have  been  audited  in  their  original  loca- 
tion in  the  revenue  accounts,  and  the  only  precaution  then  neces- 
sary in  respect  to  them  is  to  see  that  they  have  been  transferred 
correctly.  Frequently,  however,  both  charges  and  credits  are 
made  direct  to  the  Profit  and  Loss  account  during  the  year,  and 
sometimes  even  direct  upon  the  ledger  without  journalizing.  Such 
entries  should  receive  especial  scrutiny  from  the  auditor,  and 
particularly  if  customers'  accounts  have  been  closed  into  Profit 
and  Loss  for  the  stated  reason  that  they  are  considered  uncollect- 
ible. It  is  very  important  to  see  that  any  transfer  of  a  per- 
sonal account  which  withdraws  it  from  the  "live"  section  of  the 
ledger,  is  properly  authorized,  whether  it  is  carried  into  Profit  and 
Loss,  Bad  Debt,  Suspense,  or  any  equivalent  account.  Inquiry 
should  also  be  made  to  ascertain  whether  such  delinquent  ac- 
counts are  being  properly  followed  up  by  the  collection  depart- 
ment. 

THE  BALANCE  SHEET 

The  balance  sheet  is  a  condensation  of  the  final  trial  balance, 
and  should  be  in  such  form  as  to  show  in  the  most  compact  man- 
ner, and  with  due  regard  to  proper  relationship,  the  totals  of 
each  of  the  several  classes  of  Assets  and  Liabilities  of  the  busi- 
ness. 

Where  necessary,  the  balance  sheet  may  be  utilized  for  cor- 
recting any  vital  omission  from  the  books  of  account;  as,  for  in- 
stance, if  it  is  found  that  no  reserve  has  been  provided  for  bad 
debts,  depreciation,  etc.  This  should  be  rectified  upon  the  bal- 
ance sheet  by  deducting  a  proper  percentage  from  each  class  of 


49 


the  assets  liable  to  depreciation,  such  reductions  to  be  offset  by  a 
corresponding  charge  to  Profit  and  Loss. 

In  a  similar  manner,  when  such  items  as  unearned  premiums 
prepaid  on  insurance,  interest  accrued  on  loans,  rent  paid  in  ad- 
vance, etc.,  are  of  a  sufficient  amount  to  warrant  it,  credit  may 
be  given  on  the  balance  sheet  by  inserting  a  Special  Inventory 
account,  and  making  a  corresponding  credit  to  Profit  and  Loss. 

In  order  to  be  perfectly  exact,  the  stationery,  fuel,  etc.,  pur- 
chased but  unused  at  the  terminating  date  may  likewise  be  taken 
into  account  in  the  same  manner,  though  the  position  is  usually 
taken  that,  if  they  are  not  of  sufficient  value  to  be  regularly  in- 
ventoried, they  need  not  be  considered. 

Wages  accrued,  and  interest  on  notes  given,  should  appear 
upon  the  books  of  account ;  but  if  not  entered,  they  must  be  pro- 
vided for  upon  the  balance  sheet  as  "Accrued  Accounts." 

A  great  deal  has  been  written  in  respect  to  the  relative  posi- 
tions which  the  assets  and  liabilities  should  occupy  upon  the  bal- 
ance sheet,  but  the  preferred  arrangement  when  the  double-page 
form  is  used,  is  to  locate  the  assets  upon  the  left-hand  side,  with 
the  liabilities  opposite.  In  harmony  with  this,  when  the  single- 
page  form  is  employed,  the  assets  should  be  placed  before  the 
liabilities. 

The  various  items  of  assets  should  be  arranged  in  the  order 
of  their  availability  in  the  event  of  liquidation,  and  the  liabilities 
should  be  arranged  on  a  similar  basis,  in  the  sequence  of  their 
respective  preference  in  law. 

Review  the  balance  sheet  to  determine  how  far  your  investi- 
gation has  established  the  existence  of  the  assets  scheduled,  and 
if  any  items  still  lack  verification,  they  should  now  be  investi- 
gated and  confirmed. 

Satisfy  yourself  that  values  have  not  been  inflated,  and  that 
proper  deductions  have  been  made  from  the  various  items  to 
meet  discounts,  probable  losses  from  bad  debts,  depreciation,  etc. 

The  inventory,  particularly,  should  bear  the  O.  K.  of  some 


SO  RENN'S  PRACTICAL  AUDITING 

one  in  authority,  as  certification  that  the  goods  scheduled  had 
actually  been  purchased  but  remained  unsold  at  the  date  of  the 
inventory,  and  that  they  were  listed  at  prices  not  exceeding  the 
original  cost,  or  present  market  value,  whichever  is  the  lowest. 
In  addition  to  this  you  should  satisfy  yourself  of  the  correctness 
of  the  extensions  and  footings. 

Bills  Receivable,  as  well  as  other  securities,  when  not  other- 
wise verified,  must  be  examined  carefully  to  establish  their  genu- 
ineness, and  they  should  be  checked  against  the  item  which  they 
represent  upon  the  balance  sheet. 

It  is  urged,  however,  that  the  directions  given  heretofore  for 
verifying  bills  receivable,  should  be  followed. 

If  customers'  notes  have  been  discounted,  but  have  not  ma- 
tured, there  is  a  contingent  liability  involved  for  which  it  is 
necessary  that  a  reserve  be  provided. 

These  instructions  have  advised  the  procuring  of  statements 
from  trade  creditors  for  comparison  with  the  books  of  your 
client.  Of  course  you  should  assure  yourself  that  they  agree, 
and  also  make  a  careful  survey  to  determine  that  all  miscel- 
laneous liabilities,  such  as  wages,  rent,  etc.,  are  provided  for  upon 
the  balance  sheet. 

THE  AUDITOR'S  REPORT 

From  the  information  gathered  and  noted  throughout  the 
audit  make  up  your  report,  reciting  conditions  as  you  found 
them.  Call  especial  attention  to  any  irregularities  that  you  may 
have  discovered,  and  recommend  such  changes  or  improvements 
in  the  method  of  accounting  as  you  may  deem  advisable.  Ordi- 
narily the  report  should  contain  the  following  schedules  and  sta- 
tistical statements ;  and,  under  special  conditions,  still  others  may 
be  required  to  meet  the  particular  object  for  which  the  audit  was 
undertaken. 


PRACTICAL  AUDITING  51 

Balance  Sheet. 

Trading  Statement,  or  Profit  and  Loss  Account,  and  compari- 
sons with  previous  years. 

Summaries  of  the  analyses  of  the  various  Capital  Accounts 
and  Expense  Accounts,  and  comparison  with  previous  years. 

List  of  Bills  Receivable. 

List  of  other  securities  (if  any). 

List  of  Bills  Payable. 

List  of  Delinquent  Accounts. 

Recapitulation  of  the  cash  balance. 

List  of  outstanding  cheques  at  time  of  reconcilement  with 
bank  pass-book. 

List  of  unpaid  vouchers. 

List  of  missing  "paid"  vouchers  (if  any). 

List  of  missing  returned  bank  cheques  (if  any). 

Trial  balance  of  the  initial  date. 

Preliminary  trial  balance  of  the  terminating  date. 

Final  trial  balance  of  the  terminating  date. 

THE  AUDITOR'S  CERTIFICATE 

The  Balance  Sheet,  when  rendered  separately,  should  bear 
your  certificate  at  the  foot  as  follows : 

I  hereby  certify  that  I  have  carefully  examined  the  books  of 
account  of  the  Smith-Brown  Co.,  of  Chicago,  111.,  and  that  the 
above  balance  sheet  is  a  true,  correct,  and  full  statement  of  the 
condition  of  their  business  as  on  November  30,  1905,  as  disclosed 
by  said  books  of  account. 

(Signed)- 

Accountant  and  Auditor. 

Dated  at  Chicago,  111.,  December  31,  1905. 


52  RENN'S  PRACTICAL  AUDITING 

A  SPECIMEN  REPORT 

The  following  report  was  rendered  upon  completion  of  an 
audit  where  the  books  were  found  in  chaotic  condition.  It  has 
been  selected  as  a  specimen  because  it  abounds  in  criticism  and 
suggestions  for  improvement,  necessitated  by  the  condition  of 
the  accounts. 

The  student  can  readily  determine  what  features  to  omit  when 
reporting  upon  books  which  have  been  correctly  kept. 

(In  practice  the  report  is  usually  typewritten.) 


November  23,  1906, 


THE  COAL  MINING  AND  SHIPPING 
COMPANY 


ACCOUNTANT'S  AUDIT  REPORT 

on  the  Books  of  Account  for  the  eighteen  months  ended 
September  30,  1906. 


GEORGE  B.  RENN, 

Public  Accountant  and  Auditor, 
Chicago. 


1341  Dakin  Street, 
Chicago,  111. 

November  23,  1906. 

James  Smith,  Esq., 
President, 

The  Coal  Mining  '&  Shipping  Co., 
Chicago. 

Dear  Sir: 

In  compliance  with  your  instructions  we  have  made  a  thorough 
examination  of  the  Books  of  Account  and  records  pertaining  to  same, 
of  The  Coal  Mining  &  Shipping  Co.,  for  the  eighteen  months  from 
April  1st,  1905,  to  September  30th,  1906,  and  herewith  submit  our 
report  thereon. 

The  Accounts  presented  are  divided  into  two  parts,  covering  the 
business  of  twelve  months  and  six  months  respectively,  as  follows: — 

PART  1.    April  1st,  1905,  to  March  31st,  1906. 

PART  2.    April  1st,  1906,  to  September  30th,  1906. 

INDEX— PART  ONE. 

We  have  prepared  the  following  Accounts  covering  the  trans- 
actions of  the  year  ended  March  31st,  1906. 

Account  No.  1.  Balance  Sheet  as  on  March  31st,  1906. 

Account  No.  2.  General  Profit  &  Loss  Account  for  the  year. 

Account  No.  3.  Dock  General  Profit  &  Loss  Account  for  the  year. 

Account  No.  4.  Dock  No.  1  Profit  &  Loss  Account  for  the  year. 

Account  No.  5.  Dock  No.  2  Profit  &  Loss  Account  for  the  year. 

Account  No.  6.  Mine  Profit  &  Loss  Account  for  the  year. 

66 


56 


RENN'S  PRACTICAL  AUDITING 


INDEX— PART  TWO. 

The  following  Accounts  have  been  prepared  for  the  six  months 
ended  September  30th,  1906:— 

Account  No.  7.  Summarized  Trial  Balance  as  on  Sept.  30th,  1906. 
Account  No.  8.  List  of  Accounts  Receivable  as  on  Sept.  30th,  1906. 
Account  No.  9.  List  of  Accounts  Payable  as  on  Sept.  30th,  1906. 


ANALYSES— PART  ONE. 
ACCOUNT  NO.  1.   BALANCE  SHEET. 

In  the  following  paragraphs  we  give  analyses  of  various  accounts 
shown  on  Balance  Sheet: — 
TREASURY  STOCK     $49,100.00. 

BALANCE,  April  1st,  1905 $134500.00 

LESS:    STOCK  transferred  as  below: — 

Name,  426  shares $42600.00 

Name,  232  shares 23200.00 

Name,  116  shares 11600.00 

Name,    80  shares 8000.00 

85400.00 

BALANCE,  March  31st,  1906 $  49100.00 

REAL  ESTATE,  PLANT,  IMPROVEMENTS,  ETC., 
totalling  $95,534.46. 

MINE  NO.  1  REAL  ESTATE  AND  PLANT.    $67,597.01. 

BALANCE,  April  1st,  1905 $  44860.90 

REAL  ESTATE:— 

123  Acres  from  $12000.00 

78  3/10  Acres  from 5872.50 

1  Acre  from  50.00 

17922.50 

COAL  RIGHTS:— 

2024  Acres  from $  1556.25 

40  Acres  from  3000.00 

4556.25 

MACHINERY,   ETC.:— 

1  13x12  Ideal  Engine,  2nd  hand....$  550.00 

1  Austin  Steam  Separator 50.00 

1  8-ton  Head  Pan  Scale 80.00 

1  Steam  Engine,  2nd  hand 55.00 


Carried  forward   $    735.00    $67339.65 


A   SPECIMEN  REPORT  57 

Brought  forward   $    735.00    $67339.65 

MACHINERY,  ETC.  (continued):— 

Leather  Belting   26.35 

Material  New  Cars 22.31 

Bar   Iron    (use   not   specified) 99.75 

883.41 

LABOR  (Distribution  of  Mine  Pay-Roll) 5173.59 

MULES  purchased  (3) 300.00 

SUNDRIES:— 

Machinery  Repairs  and  Supplies.  ...$    356.12 

Services  Mining  Engineer 54.50 

Freight    (adjusting   undercharge    on 

Machinery  and  Supplies) 1.35 

411.97 


TOTAL  DEBITS   $  74108.62 

CREDITS. 
SALES:— 

Old  Hoisting  Engine $550.00 

Old  Scale  60.00 

Old  Elevator   50.00 

Revolving  Screen   20.00 

Scrap  Iron,  etc 296.42 

3  Mules  sold 235.00 

$  1211.42 

ROYALTY,  charged  to  Coal  Account..     3772.19 

REFUND  on  Purchase  from 1500.00 

MINE  ASSETS  COLLECTED 28.00 

6511.61 


BALANCE,  March  31st,  1906 $  67597.01 

You  will  note  that  Machinery,  Tools,  Machinery  Repairs  and 
Supplies  are  included  in  the  charges  to  this  account  and  also  in  the 
Improvement  Account  (details  of  which  are  given  below)  showing  a 
lack  of  uniformity  in  the  distribution  of  charges.  An  examination  of 
the  other  accounts  would  seem  to  indicate  that  the  distribution  of 
accounts  was  left  to  the  opinion  of  whoever  approved  the  charges, 
without  reference  to  any  definite  plan.  This  practice  minimizes  the 
value  of  the  distribution,  and  the  remedy  therefor  is  made  the  subject 
of  another  part  of  this  report,  "Distribution  of  Accounts." 

The  credit  for  Royalty,  which  is  made  each  month,  we  presume 
is  considered  as  the  Depreciation  of  the  Mine,  but  no  Depreciation 
has  been  written  off  Improvement  and  other  asset  accounts.  The 
subject  of  Depreciation  is  considered  in  a  later  paragraph. 


58  RENN'S  PRACTICAL  AUDITING 

MINE  NO.  1  IMPROVEMENTS.    $25,733.14. 

MACHINERY,  EQUIPMENT,  ETC.:— 

Goodman  Electrical  Machinery. $  3000.00 
1  Pr.  18x36  Hoisting  Engines  (with 

packing)   1930.00 

51  Coal  Cars   1375.00 

1  Weigh  Pan  and  1  Shaker  Screen  1075.00 

1  Electric   Generator    900.00 

1  20'  Fan  and  12x24  Engine 685.00 

1  Pr.  Self-dumping  Cages 425.00 

59  Sets  13"  S.  O.  Wheels  with  axles  481.00 

283  Cast   Iron   Bumpers 141.50 

25  13"  Wheels  for  Cars 37.50 

Bar  Iron  for  Cars 103.46 

Double  Dynamo  Belt 49.82 

Pulleys,    Belting,    Shafting    and 

Hangers   87.52 

Pipe  and  Boiler  Covers  and  As- 
bestos Cement 65.77 

2  Lubricator  Pumps  at  $42,00 84.00 

1  Power     Post    Drill    with    C.  S. 

Pulley  and  Hangers 39.00 

1  Loco.  Arc  Headlight  with   Car- 

bons      37.00 

,     3  Mandrils  for  Saw,  Emery  Wheel 

and  Grinders   23.00 

2  Radiators   25.00 

1  Reel  for  Copper  Wire 10.00 

1  %  ton  Chair  Hoist 9.10 

1  Buffalo  Blower  9.10 

1  Circular    Saw    $6.00,     1     Emery 

Wheel  $2.03   8.03 

1  Steel  Barrow  5.70 

3  No.  1  Trolley  Supports  $3.60,  1 

Switch  $4.05  7.65 

1  Arbor  for  No.  2  Morse  Socket..  1.00 

$  10615.15 

Labor   and    Material   used   in    Construction   of 
New  Buildings  and  in  sundry  Improvements 

and  Maintenance  9571.35 

Machinery  Supplies  and  Repairs 2333.23 

Steel  Rails,  Joints  and  Spikes 2444.56 

R.  R.  Ties  504.02 

Freight  and  Express  264.83 

BALANCE,  March  31st,  1906 $  25733.14 


A   SPECIMEN  REPORT  59 

Included  in  the  foregoing  item  for  Labor  and  Material  are  several 
charges  for  Maintenance  of  Plant,  which  should  have  been  charged 
against  cost  of  operation. 

In  the  foregoing  account  there  is  a  charge  for  two  Lubricator 
Pumps  at  $42.00  each.  Only  one  pump  was  purchased,  but  two  bills 
were  rendered  for  same  and  both  bills  were  passed  and  paid.  One  bill 
was  rendered  by  the  maker  of  the  pump  in  Chicago,  and  some  weeks 
later  another  bill  was  passed  in  favor  of  the  Sales  Agent  in  St.  Louis, 
who  had  also  rendered  a  bill.  An  effort  is  now  being  made  to  recover 
the  amount  paid  to  the  St.  Louis  Agent. 

Included  in  the  item  of  Machinery,  Supplies  and  Repairs,  is  a 

duplicate  charge  for  1  Breeching  purchased  from  ,  Invoice  No. 

396,    amount   $55.00.     This    same   breeching   was   again    charged    on 

Invoice  No.  459  and  paid  for.    We  are  informed  that  Mr.  has 

acknowledged   the  error  and  remitted  the  amount. 

Both  of  the  above,  errors  are  the  result  of  carelessness  on  the  part 
of  your  Mine  Clerk,  or  lack  of  a  proper  Receiving  Book  being  kept 
there.  A  description  of  a  good  Receiving  Book  is  given  in  the  latter 
part  of  this  Report. 

There  are  also  included  in  the  item  "Labor  and  Material"  several 

bills  for  timbers  or  lumber  purchased  from  ,  and  during  the 

examination  of  this  account  we  found  that  Invoice  No.  284,  amounting 
to  $126.68  had  been  paid  for  twice.  Steps  are  now  being  taken  to 
recover  this  amount.  This  error  was  made  in  your  Chicago  Office, 
and  caused  by  charging  the  amount  of  the  first  cheque  to  Improvement 
Account  through  the  Cash  Book  direct,  and  later  charging  the  invoice 
to  Improvement  Account  and  crediting  the  account  of  the  shipper 
through  the  Journal.  A  correct  Voucher  System  (such  as  is  referred 
to  later)  would  render  such  errors  impossible. 

SAW  MILL     $1745.10. 

Jan.  15,  1906.     Purchase  price  of  Mill $1600.00 

3   Wagons   purchased 145.10 


BALANCE,  March  31st,  1906..  ..$1745.10 


60  RENN'S  PRACTICAL  AUDITING 

DOCK  NO.  1  PERSONAL  PROPERTY    $322.18. 

BALANCE,  April  1st,  1905 $  113.50 

Purchases :    6  Wheelbarrows    $60.00 

4  doz.  Scoops  49.98 

\l/2  doz.  Scoops 23.25 

Coal  Chutes  $22.52,  Baskets  $14.00 36.52 

Window  Shades,  office 10.45 

Gasoline  Lamps   12.50 

Misc.  Tools  and  Supplies 15.98        208.68 


BALANCE,  March  31st,  1906 $  322.18 


The  balance  of  the  above  account  is  carried  as  an  Asset  on  your 
Books,  but  it  will  be  readily  seen  that  most  of  the  additions  to  same 
during  the  year  were  not  of  a  permanent  nature. 

DOCK  NO.  2  PERSONAL  PROPERTY  $137.03. 

BALANCE,  April  1st,  1905 $142.23 

4  1-ton  Dump  Coal  Buckets 254.80 


$397.03 
LESS:     Repairs,  etc.,  paid  for  by Ry.  Co.  260.00 


BALANCE,  March  31st,  1906 $137.03 


It  is  evident  that  the  above  balance  does  not  represent  the  inven- 
tory value  of  Dock  Property.  The  cost  of  making  the  various  repairs, 
which  has  been  partly  refunded  by  the  receipt  of  the  $260.00  above 
credited,  was  originally  charged  to  the  Expense  Accounts  and  the 
refund  should  have  been  carried  to  the  same  accounts. 

STOCKS  as  per  Inventories.    $98,726.22. 

The  amounts  representing  the  inventory  values  of  various  stocks 
on  hand  are  as  shown  on  your  Books  of  Account  and  could  not  be 
verified  by  us. 

FURNITURE  AND  FIXTURES     $658.30. 

BALANCE,  April  1st,  1905 $444.50 

Filing  Cabinets,  etc 107.80 

1  No.  7  Remington  Typewriter 60.00 

1  No.  1  Pica  Underwood  Typewriter 46.00 


BALANCE,  March  31st,  1906 $658.30 


A   SPECIMEN  REPORT  61 

BILLS  RECEIVABLE    $156.07. 

This  item  represents  a  note  which  has  since  been  paid. 

SPECIAL  ACCOUNTS     $14,655.43. 

The  above  represents  overcharges,  and  adjustments,  which  have 
been  charged  to  various  shippers,  and  are  now  in  process  of  settle- 
ment. 

CAPITAL  STOCK    $250,000.00. 

The  entries  made  for  the  increase  of  the  Capital  Stock  from 
$50,000.00  to  the  above  amount  were  made  prior  to  April  1st,  1905, 
but  we  examined  same  and  found  them  correct. 

SURPLUS  ACCOUNT     $17,326.24. 

This  account  as  shown  on  Balance  Sheet  represents  the  Surplus 
for  the  season  1905-1906.  There  was,  however,  a  credit  balance  of 
$27,454.39  at  the  close  of  the  business  of  the  Old  Coal  Co.,  March  31, 
1905,  prior  to  the  increase  of  the  Capital  Stock.  This  Surplus  was 
distributed  pro  rata  among  the  holders  of  the  $50,000.00  Capital 
Stock,  as  follows: — 

Name,  275  shares $15099.92 

Name,  150  shares 8236.32 

Name,     75  shares 4118.15 


500  shares  $27454.39 


ACCOUNT  NO.  2.     GENERAL  PROFIT  AND  LOSS  ACCOUNT. 

The  charges  entered  under  the  various  headings  require  no  ex- 
planation, the  amounts  entered  opposite  each  of  the  items  being  as 
accurate  as  could  be  obtained  from  the  accounts  as  kept  in  your 
Books. 

ACCOUNT  NO.  3.  DOCK  GENERAL  PROFIT  AND  LOSS 
ACCOUNT. 

We  give  below  the  details  of  the  Superior  Coal  Account,  and 
Steamer  Loss  and  Gain  Account.  The  amounts  entered  as  the  Loss 
and  Gain  at  the  Omaha  and  Denver  Agencies,  respectively,  are  as 
shown  in  the  accounts  in  the  Chicago  Office,  but  as  the  General 
Accounts  of  these  Agencies  are  not  kept  in  Chicago,  we  have  not 


62  RENN'S  PRACTICAL  AUDITING 

verified  these  amounts.    We  understand  these  Agencies  are  under  the 

personal  supervision  of  Mr. ,  Secretary.    The  Losses  and  Gains 

of  Docks  No.  1  and  2  are  given  in  Accounts  4  and  5  respectively. 

SUPERIOR  COAL  ACCOUNT,  GAIN     $8322.68. 
CHARGES:— 

Coal  Purchases  $90345.11 

Cargo  Insurance 149.44 

Interest  on  Notes  given  for  purchases 29.03 

CREDIT:— 

Coal  Sales $98846.26 

PROFIT  as  above..  8322.68 


$98846.26    $98846.26 


STEAMER  FUEL  ACCOUNT,  GAIN     $3661.08. 

SALES  to  Steamers $20095.45 

COST  OF  FUEL  as  per  Fuel  bills 16027.59 


$  4067.86 
LESS:     10  per  cent  paid  to  Agent 406.78 


NET  GAIN  as  above $  3661.08 


ACCOUNT  NO.  4.    DOCK  NO.  1  PROFIT  AND  LOSS. 

In  considering  the  cause  for  this  Account  showing  a  large  loss, 
while  the  Dock  No.  2  Account  shows  a  gain,  it  will  be  noted  that  the 
Selling  and  General  Expenses  and  the  Taxes  and  Insurance  amount 
to  about  $6500.00  more  than  at  Dock  No.  2. 

At  At 
Dock  No.  1.      Dock  No.  2. 
The    Coal    on    hand  April   1st,   1905, 
and    Coal    purchased    was    approxi- 
mately   $158400.00        $156700.00 

The  sales  and  coal  on  hand  March  31, 

1906,  was  approximately  217750.00          224900.00 


Leaving  Gross  Profit  against  which  to 
charge  Cost  of  Handling  and  all 
other  expenses  $  59350.00  $  68200.00 


These  figures  would  indicate  that  either  the  coal  cost  a  higher 
price  or  was  sold  at  closer  figures  at  Dock  No.  1  than  at  Dock  No.  2. 


63 


Analyses  of  certain  accounts  shown  in  Account  No.  4  are  given 
herewith. 

BITUMINOUS     AND     ANTHRACITE,     DISCHARGING     AND 
LOADING  ACCOUNTS. 


Distribution 


Discharging     Discharging; 
Bit.  Anth. 


Labor    $6158.11  $2419.69 

Fuel    361.29  145.41 

Light  79.58  14.36 

Repairs   64.52  47.05 

Supplies    28.34  18.66 


Loading 
Bit. 

$8347.60 
44.16 


57.17 
13.48 


Loading 
Anth. 

$7652.28 

181.61 
67.07 
21.06 
14.16 


Total* 

$24577.68 

732.47 

161.01 

189.80 

74.64 


$6691.84    $2645.17    $8462.41     $7936.18    $25735.60 


If  the  charges  against  Discharging  and  Loading  Anthracite  (as 
shown  by  the  above  statement)  are  correct,  it  appears  that  the  coal 
for  the  A.  &  B.  Company  was  handled  on  too  close  a  margin  to  insure 
any  profit,  as  the  Anthracite  Commission  Accounts  show  receipts  of 
only  $10735.01. 

GENERAL  AND  DOCK  EXPENSES  $6596.47. 

GENERAL  EXPENSES:— 

Rent  of  Dock $  1933.32 

Rent   of   Office 387.50 

Expenses  with  Trade 132.62 

Switching    2.00 

Light  $20.87,  Water  Tax  $15.00 35.87 

Postage  Stamps   40.00 

Advertising    26.00 

Donations   10.00 

Sundry  Supplies  and   Expense 102.24 

$  2669.55 

DOCK  EXPENSE:— 

Labor   $  2840.80 

Machinery  Repairs    594.28 

Supplies  and  Tools 245.88 

Cribbing  Bins   138.35 

Light    52.50 

Fuel  $25.22,  Water  $4.78 30.00 

Donations    10.00 

Stationery  and  Sundries 15.11 

3926.92 


$  6596.47 


64 


RENN'S  PRACTICAL  AUDITING 


TAXES  AND  INSURANCE     $1785.70. 

Real  Estate  Taxes,  1904 $  92.67 

Real  Estate  Taxes,  1905 615.50 

Personal  Property  Taxes  231.85 

Fire  Insurance  304.03 

Employer's  Liability   520.65 

Surety  Bond  Premium 21.00 


$  1785.70 


FOREIGN  COAL  CR. 


$167.35. 
Inventory 


April      1st, 


BALANCE, 

1905    $     161.40 

Coal  Purchases  27429.04 

Commissions  477.93 

Sales    $28235.72 

BALANCE,  Profit  as  above 167.35 


$28235.72    $28235.72 


ACCOUNT  NO.  5.    DOCK  NO.  2  PROFIT  AND  LOSS. 

Details  of  various  charges  and  credits  are  given  in  the  following 
paragraphs: — 

BITUMINOUS     AND     ANTHRACITE,     DISCHARGING    AND 
LOADING  ACCOUNTS. 


Diitribution 


Discharging      Discharging         Loading 
Bit.  Anth.  Bit. 


Labor  $11506.27  $1689.19  $6156.94  $3001.90  $22354.30 


Fuel    

457.03 

120.00 

540.33 

1117.36 

Misc.    Repairs... 
Supplies    

46.22 
44.30 

42.37 
6.60 

317.09 
105.61 

9.90 
.64 

415.58 
157.15 

Sundries    .       .  .  . 

46494 

46494 

Repairing  Dam- 
aged Boat   .  .  . 

90.29 

90.29 

Cribbing     

179.78 

17978 

$12609.05 

$2037.94 

$7119.97 

$3012.44 

$24779.40 

The  Discharging  Bituminous  Account  was  charged  with  Repairs 
amounting  to  $342.21,  but  the  net  charge  was  reduced  to  $46.22  on 

account  of  certain  repairs  being  charged  to  the Ry.  Co.    We  do 

not  know  the  reason  for  crediting  all  of  the  amount  so  charged  to  this 
account,  as  it  would  seem  probable  that  some  of  these  repairs  were 
originally  charged  against  other  accounts. 


A  SPECIMEN  REPORT 


65 


GENERAL  AND  DOCK  EXPENSE  $5553.66. 

GENERAL  EXPENSE:— 

Rent  of  Dock $2500.00 

Rent  of  Office 135.00 

Sundry  Office  Expenses 70.83 

Sundry  Repairs  58.38 

Freight   29.55 

Donations    13.00 

$2806.76 

DOCK  EXPENSE:— 

Labor  $2612.49 

9  Tram  Cars  256.50 

Freight  on  Machinery,  etc 108.88 

Repairs  to  Machinery 23.03 

Repairs  to  Dock 9.75 

Supplies    16.61 

$3027.26 

Less:     Sundry  Repairs  charged  to  

Ry.  Co 280.36 

2746.90 

TOTAL  as  above  $5553.66 

TAXES  AND  INSURANCE     $730.53. 

Real  Estate  Taxes,  1905 $  140.00 

Employer's  Liability   569.53 

Surety  Bond  Premium 21.00 


TOTAL   ..$  730.53 


Included  in  the  charge  as  above,  for  Liability  Insurance,  is  an 
amount  of  $147.70  chargeable  against  the  season  of  1904-1905,  which 
should  have  been  charged  to  the  Old  Coal  Co.  Profit  and  Loss  Ac- 
count. 

PLANT  ACCOUNT    $275.00. 

BALANCE,  April  1st,  1905 $4225.00 

(Book  value  of  Dock.) 


Sold  to $4500.00 

Profit  on  Sale..  275.00 


$4500.00    $4500.00 

DOCK  OVERAGE    $110.29. 

This  being  a  profit  of  the  season  1904-1905,  this  amount  should 
have  been  credited  to  the  Old  Coal  Co.  Profit  and  Loss  Account. 


66  RENN'S  PRACTICAL  AUDITING 

ACCOUNT  NO.  6.    MINE  NO.  1  PROFIT  AND  LOSS. 
Details  are  given  for  the  following  accounts: — 

MAINTENANCE     $2943.30. 

Labor  and  Material: — 

Timbering  and  Lumber $1563.01 

Re-timbering  Escapement  Shaft  and  new  Ladders ....  199.47 

Re-timbering  Hoisting  Shaft 228.93 

Machinery  Supplies  and  Repairs 677.34 

Bricklaying,  building  Engine  Bed  in  Shop  and  Stop- 
pings in  Mine  35.20 

Brick  for  Stoppings   27.50 

Re-plastering  Fire  Walls   24.35 

Painting    82.91 

Roofing  Barn   32.00 

New  Drain  Pipe  from  Scale  Pit 18.50 

Repairing  Roof   7.12 

Repairing  and  Testing  Scales 46.97 


$2943.30 

Items  such  as  building  new  engine  bed  and  new  drain  pipe  from 
Scale  Pit  should  have  been  charged  to  Improvement  Account. 

TAXES  AND  INSURANCE    $1265.42. 

Real  Estate  Taxes $  172.07 

Personal  Property  Taxes  57.08 

Employer's  Liability   644.43 

Fire  Insurance  291.84 

Steam  Boiler  Insurance   .  100.00 


$1265.42 

To  prepare  absolutely  correct  Profit  and  Loss  Accounts  it  would 
be  necessary  to  consider  unexpired  insurance,  etc.,  which  has  not 
been  done. 

SPECIAL  CHARGES     $625.28. 

Included  in  the  item  of  Legal  Expense  is  an  amount  of  $100.00 
paid  to ,  Attorney,  for  securing  option  on  property.  A  sim- 
ilar payment  of  the  same  amount  was  charged  to  the  Plant  Account, 
as  a  part  of  the  cost  of  the  property. 


A   SPECIMEN  REPORT  67 

MACHINERY  AND  IMPROVEMENTS     $229.22. 

Steel  Rails,  etc $138.48 

1  No.  5  O.   Sc.   Plate    25.00 

1  No.  2  Oil  Filter   15.00 

1  No.  1  Forge    14.40 

1-8  ton  Lifting  Jack   8.00 

1  Drill  Press,  2nd  hand   8.00 

1  Wooden   Pump    5.34 

1  Office  Desk   .  15.00 


$229.22 

The  above  should  not  have  been  charged  against  the  year's  earn- 
ings. 

ANALYSES— PART  II. 

ACCOUNT  NO.  7.    SUMMARIZED  TRIAL  BALANCE. 

This  account  shows  the  balances  of  the  various  Asset  and  Lia- 
bility Accounts  as  at  Sept.  30th,  1906,  and  analyses  of  certain  accounts 
are  given  in  the  succeeding  paragraphs. 

TREASURY  STOCK    $49,100.00. 

The  balance  of  this  account  is  the  same  as  shown  in  Account 
No.  1. 

REAL     ESTATE,     PLANT    AND     IMPROVEMENTS,     totalling 
$103,134.65. 

MINE  NO.  1  PLANT.    $71,528.38. 

BALANCE,  March  31st,  1906 $67597.01 

Coal  Rights,  82  Acres 6150.00 

3  No.  1  Drills,  purchased  Oct.  20th,  1904 21.00 

Labor  and  brick  for  fire  wall 206.45 

1  Team   Horses  with  harness 335.00 

1  Mule    .  135.00 


$74444.46 
Less:  Sales: — 

Scrap  $131.34 

Machinery    55.20 

1  team  Horses 27.50 

$  214.04 

Royalty  charged  to  Coal  Account.  2592.04 

1  Mule  killed  110.00        2916.08 

BALANCE  $71528.38 


68  RENN'S  PRACTICAL  AUDITING 

MINE  NO.  1.    IMPROVEMENTS    $28,879.63. 

BALANCE,  March  31st,  1906 $25733.14 

25  Coal  Cars    625.00 

25  Sets  13"  S.  O.  Wheels  with  axles 225.00 

Iron,  Lumber,  etc.,  for  new  cars 231.00 

1  Armature  for   Elec.   Locomotive 312.00 

1  Rail   Bender    16.65 

Steel  Rails,  etc 867.63 

Lumber,  etc.,  for  New  Buildings  and  Extensions.  137.11 

Painting  Office  Addition  and  New  Engine  Room  52.10 

Plastering  Engine  Room 31.50 

Lumber  for  New  Switches 10.50 

Labor  and  Supplies  used  for  New  Improvements 

and  for  Repairs    635.34 

Freight   2.66 


BALANCE  $28879.63 


SAW    MILL   $1805.46. 

BALANCE,  March  31st,  1906 $  1745.10 

1  No.  46  B.  Sharpener  with  emery  wheel  and  bolt..  35.00 

Freight  on  above 2.08 

Freight  on  Machinery  charged  to  this  account  in 

March,   1906    23.28 


BALANCE   .  ..$  1805.46 


DOCK  NO.  1  PERSONAL  PROPERTY    $550.20. 

BALANCE,  March  31st,  1906 $  322.18 

1  Single  Wagon    50.50 

3  Coal  Screens  28.50 

1  Screw  Plate    17.85 

1  Anvil  $10.54,  1  Vise  $7.50 18.04 

7  doz.  Scoops,  $91.21,  2  Coal  Chutes  $8.40 99.61 

Misc.  Tools,  etc 13.52 


BALANCE  .  ..$    550.20 


DOCK  NO.  2  PERSONAL  PROPERTY    $296.48. 

BALANCE,  March  31st,  1906 $  137.03 

6  Wheelbarrows    60.00 

7  doz.  Scoops  91.43 

Freight  on  above 8.02 


BALANCE   $    296.48 


A   SPECIMEN  REPORT  69 

The  Scoops  and  Tools  charged  to  the  Personal  Property  Ac- 
counts, not  being  permanent  assets,  should  have  been  charged  against 
operating  costs. 

77th  ST.  YARD  PERSONAL  PROPERTY  $74.50. 

Purchases:    4  Wheelbarrows   $  37.00 

2  Autographic   Registers    37.50 


BALANCE $  74.50 


FURNITURE  AND  FIXTURES  $688.30. 

BALANCE,  March  31st,  1906 $658.30 

1  Smyrna  Rug 30.00 


BALANCE  $688.30 


BILLS  PAYABLE  $190,382.67. 

The  above  consists  of  the  following  items: — 
NOTES  DISCOUNTED  AT  BANKS:— 

Tenth  National  $35000.00 

Eleventh  National   25000.00 

$  60000.00 

NOTES  GIVEN  FOR  DOCK  COAL  PURCHASES..  112890.18 

OTHER  NOTES:— 

Name,  due  6/12/1907 $  3500.00 

Name,  due  3/25/1907 1000.00 

Name,  due  3/25/1908 1000.00 

Name,  due  5/  1/1907 1731.25 

Name,  due  5/  1/1908 1731.25 

Name,  due  5/  1/1907 478.12 

Name,  due  on  demand 8051.87 


17492.49 
$190382.67 

OLD  COAL  CO.  PROFIT  AND  LOSS    $1675.88. 

We  understand  this  account  should  be  charged  and  credited  with 
all  items  affecting  the  business  of  the  Old  Coal  Co.,  and  the  final 
balance  of  same  will  be  charged  or  credited  to  the  Stockholders  of  the 
Old  Coal  Co.  as  at  March  31st,  1905.  However,  several  losses  and 
gains  on  the  business  prior  to  the  above  date  were  not  carried  to  this 
account,  as  is  shown  on  the  Profit  and  Loss  Accounts  herewith  sub- 
mitted. 


70  RENN'S  PRACTICAL  AUDITING 

A  summary  of  the  charges  and  credits  resulting  in  the  foregoing 
credit  balance  is  given  below: — 

CHARGES. 

Reduction  and  cancellation  of  R.  R.  Claims $  126.61 

Claim  collected  and  credited  in  error  to  Special  Ac- 
count.     Credit    given    to    Railroad    Account    and 

charged  here,  as  Special  Account  is  closed 276.00 

Sundry  Allowances  to  Customers 330.80 

BAD  DEBTS:— 

Name    $40.30 

Name    49.50 

Name    49.66 

139.46 

.Claim  of M.  Co 141.77 

March  1905  Expenses  of  204.00 

Freights     191.79 

Commissions,  February  and  March 30.40 

Legal    Expenses    763.23 

CR.  BALANCE,  as  above 1675.88 


$3879.94 
CREDITS. 

BAD  DEBTS  RECOVERED:— 

Superior  F.  &  T.  Co $    31.50 

Coll.      through      M.      &     A.      (name     not 

entered  in  Cash  Book) 11.25 

Unclaimed  Credit 4.68 

,  Agent,  85  per  cent  of  this  account 

transferred,    representing   estimated 

profit  on  special  purchases  1904-1905...  3832.51 

3879.94 


A  portion  of  the  above  charge  for  Legal  Expenses  should  have 
been  charged  to  The  Coal  Mining  &  Shipping  Co.,  and  also  a  part  to 
the  Retail  Coal  Co.  as  the  bill  rendered  by  the  attorneys  covers 
organization  of  The  Coal  Mining  &  Shipping  Co.,  and  various  other 
services. 

SUNDRY  PROFIT  AND  LOSS  ACCOUNTS. 

The  amounts  entered  under  the  above  heading  are  the  totals  of 
the  various  balances  of  Profit  and  Loss  Accounts  as  at  Sept.  30th,  1906. 
No  Profit  and  Loss  Accounts  can  be  submitted  covering  the  six 
months,  as  the  accounts  included  under  this  heading  were  not  closed. 


A   SPECIMEN  REPORT  71 

ACCOUNTS  NOS.  8  AND  9.    ACCOUNTS  RECEIVABLE  AND 

PAYABLE. 

In  these  accounts  are  given  the  balances  of  all  Sundry  Debtor  and 
Creditor  Accounts  as  on  Sept.  30th,  1906,  which  have  been  carefully 
examined  and  verified.  Those  accounts  which  appeared  doubtful  are 
listed  at  the  close  of  Account  No.  8. 

DIVIDEND  ACCOUNT  NO.  1. 

Below  are  the  details  of  this  account: — 

CREDIT.    TRANSFER  FROM  PROFIT  AND  LOSS 

for  dividend  of  8  per  cent  declared  May  7th,  1906. . .  .$16072.00 

DEBITS.     DISTRIBUTED    TO    STOCKHOLDERS, 
as  follows: — 

Name,  1431  shares $11448.00 

Name,    352  shares 2816.00 

Name,    176  shares 1408.00 

Name,      50  shares 400.00 

16072.00 


After  the  payment  of  this  dividend  there  remains  a  surplus  of 
$1403.32  from  the  business  of  the  season  of  1905-1906,  as  shown  on 
your  Books  of  Account. 

PROFIT  AND  LOSS  ACCOUNT.    OLD. 

The  Surplus  of  $17,326.24  as  at  March  31st,  1906,  was  carried  to 
this  account  and  the  account  has  since  been  changed  by  the  following 
entries,  which  represent  losses  and  gains  of  the  season  1905-1906: — 

CREDIT  BALANCE,  March  31st,  1906 $17326.24 

Adjusting  Claims    4.14 

Transfer  ,  Agent 676.33 

15  per  cent  of  credit  balance,  representing  estimated 
profit  on  special  purchases  in  1906. 

Unclaimed  Credits: — 

Name,  August,  1904 $167.19 

Name,  October,   1905 36.23          203.42 


B.  &  O.  Fuel  Co.  Account 4.00 

Refund  from  Subscription  to  Coal  Assn 2.25 

$18216.38 
CHARGES. 

Dividend  No.  1,  8  per  cent $16072.00 

Reduction  and  cancellation  of  claims 493.78 

Freights   147.61 

Loss  on  Cargo  of  "Inter  Ocean" 41.69 

Carried  forward   $16755.08    $18216.38 


72  RENN'S  PRACTICAL  AUDITING 

Brought  forward  $16755.08    $18216.38 

Bad  Debts:— 

Name $  2.35 

Name 3.40 

Name 41.30 

Name 10.93 

57.98 
16813.06 


CREDIT  BALANCE,  Sept.  30th,  1906 $  1403.32 


PROFIT  AND  LOSS  ACCOUNT  (1906-1907). 

The  following  charges  have  been  made  to  this  account: — 

Reduction  of  Claims $17.97 

Cost  of  re-consigning  car 5.00 


BALANCE,  Sept.  30th,   1906 $22.97 


The  charges  for  reduction  and  cancellation  of  claims  should  be 
made  against  the  account  which  is  credited  at  the  time  claims  are 
made. 

The  cost  of  re-consigning  shipments  should  be  charged  against 
Freight  Account,  as  it  is  an  additional  delivery  charge. 

CASH. 

The  Cash  Balance  of  $17,639.96,  as  shown  on  Account  No.  7,  was 
verified  and  the  details  are  given  herewith: — 
CASH  IN  BANKS:— 

Tenth  National,  Chicago $  9813.91 

Eleventh  National,  Chicago 7992.16 

Fifth  National,  Denver 1058.23 

Sixth  National,  Omaha 810.01 

Peoples  Savings,  Butte   2006.02 

Seventh   National,  Seattle 349.66 

Eighth  National,  Olympia 642.57 

Ninth  National,  San  Francisco 4.14 


$22676.70 
CHEQUES  on  hand  to  deposit 484.78 

$23161.48 
LESS:     CURRENCY  OVERDRAFT  (due  Treasurer)  ..     5521.52 

BALANCE,  as  above $17639.96 


A  SPECIMEN  REPORT 


73 


The  Currency  Overdraft  was  caused  by  entering  a  currency  dis- 
bursement of  $10,000.00  during  September  in  exchange  for  cheque, 
and  cheque  not  being  issued  until  October. 

The  amount  of  Cash  on  hand  with  your  Treasurer  on  the  morn- 
ing of  Oct.  1st,  1906,  was  counted  and  found  to  be  made  up  as  fol- 
lows:— 

Exchange  for  cheque  as  above $10000.00 

Less:     Overdraft    5521.52 

BALANCE,  Oct.  1st,  1906 $  4478.48 

This  balance  consisted  of: — 

CASH:— 

Currency $1023.00 

Coin    2.75 

$1025.75 
ADD:    Cash  received  10/1  for  Yard  Sales 

during  September    76.10 

$1101.85 

LESS:     Payment   to   charged    his 

Sept.  Account  15.00 

$  1086.85 

TICKETS:— 

Name,   dated    May    15th,    1906,    for    stock 

from  $2500.00 

Name,  paid  to 500.00 

Name,  Sundry  advances  dated  July  to  Sep- 
tember         295.00 

Name  25.00 

Name  10.00 

Name  2.00 

Name   (no  regular  ticket) 29.01 

3361.01 

REVENUE  STAMPS   5.15 

$  4453.01 
ADD:    CASH  SHORTAGE  .  25.47 


TOTAL   .  ..$  4478.48 


We  cannot  too  strongly  criticise  the  practice  of  carrying  such 
large  tickets  as  Cash  on  hand,  as  any  large  amounts  advanced  for 
more  than  a  few  days  should  be  charged  upon  the  Books  of  Account. 


74  RENN'S  PRACTICAL  AUDITING 

The  cash  shortage  above  noted  and  the  entire  omission  of  two 
vouchers  paid  during  July  (Nos.  3920  and  3923  amounting  to  $31.30) 
would  indicate  that  sufficient  time  was  not  given  to  the  keeping  of 
the  Petty  Cash  Account.  We  recommend  the  use  of  a  Petty  Cash 
Book  in  which  to  record  all  currency  transactions,  and  from  which 
all  entries  would  be  posted  to  the  Ledgers.  This  book  could  be  kept 
by  a  clerk  having  charge  of  the  currency,  and  thereby  relieve  your 
Treasurer  of  this  clerical  work  and  allow  him  more  time  for  other 
duties.  We  suggest  that  currency  transactions  and  cash  balances  in 
Petty  Cash  Account,  be  kept  as  small  as  possible,  making  disburse- 
ments by  cheques  where  practicable. 

The  Bank  Balances  as  shown  by  Cash  Book  were  reconciled  with 
the  statements  rendered  by  the  Banks  and  found  to  agree. 

CHEQUES. 

All  cheques  returned  from  Banks  were  carefully  examined  as  to 
signatures,  endorsements,  etc.,  and  the  amounts  of  same  were  com- 
pared with  the  corresponding  entries  in  Cash  Books,  and  were  found 
in  order  with  the  following  exceptions: — 

Cheques  Nos.  134,  135  and  136  on  the  Peoples  Savings  Bank 
were  not  seen,  although  we  were  informed  the  bank  claimed 
they  had  returned  them,  and  had  charged  them  on  their  state- 
ment. 

Cheques  not  endorsed  by  payees: — No.  1816,  Tenth  National,  Chi- 
cago, to  ,  $250.00,  and  No.  3179,  Tenth  National,  Chi- 
cago, to ,  $27.50. 

Cheques  Nos.  3121  to  3125  incl.  and  3128  on  Tenth  National,  Chi- 
cago, were  not  countersigned. 

Cheque  No.  1757,  Tenth  National,  Chicago,  and  No.  537,  Eleventh 
National,  Chicago,  were  for  exchange  on  collections  prior 
to  March  31st,  1905,  amount  $30.28.  These  were  charged  to 
Exchange  Account,  but  should  have  been  charged  to  Old 
Coal  Co.  Profit  and  Loss. 

We  found  that  an  unusually  large  number  of  cheques  were  marked 
"Void,"  which  would  indicate  a  lack  of  care  in  making  them  out. 

VOUCHERS. 

All  vouchers  on  file  were  carefully  examined  and  compared  with 
the  corresponding  entries  in  Cash  Books,  and  with  a  few  exceptions 
were  found  in  order. 


A    SPECIMEN  REPORT  75 

A  number  of  the  vouchers  were  not  certified  as  correct  by  the 
parties  who  made  them  out  and  a  few  were  found  which  were  not 
approved  by  an  officer  of  the  Company. 

Voucher  No.  3809  in  favor  of  —  -  was  made  for  $45.00,  but  the 
entry  in  Cash  Book,  folio  47,  was  for  $60.00.  As  this  was  the  amount 
of  his  salary,  we  presume  the  cash  book  entry  is  correct. 

Voucher  No.  3920,  Name,  $1.05. 

Voucher  No.  3923,  Name,  $30.25. 

These  were  made  out  and  paid  during  July,  1906,  but  we  found 
they  were  not  entered  in  Cash  Book. 

The   following  vouchers  were  not  seen  by  us: — 

No.  1499.    July  2,    1905.     Mine    Plant   A/c.      Purchase   of   Land 

$4500.00. 

No.  1632.  July  26,  1905.  -Freight  A/c.  .   5418.67. 

No.  2183.  Oct.  26,  1905.  .  247.80. 

No.  4139.    August,  1906. 

No.  4252.     September,  1906. 

No.  4272.     September,  1906. 

No.  4280.     September,  1906. 

No.  4304.     September,  1906. 

No.  4317.     September,  1906. 

No.  4318.     September,  1906. 

No.  4366.     September,  1906. 

No.  4139  and  the  succeeding  vouchers  were  not  returned  at  the 
time  we  made  the  examination. 

Vouchers  were  seen  for  nearly  all  cash  disbursements.  Below  we 
give  a  list  of  all  disbursements  in  excess  of  $1.00,  charged  to  imper- 
sonal accounts,  for  which  no  vouchers  were  seen: — 

1905.     Folio.  Name  of  Account.  Amount. 

Apr.  30.     213.     Expense.     Petty  Exp $      3.60 

June  30.     241.     Expense.     Stamps  a'nd  Sundries 5.32 

June  29.     241.     Expense.     Stamps  and  Sundries 7.48 

July   31.     255.     Expense.     Stamps  (3  items) 2.96 

Aug.  30.     265.     Omaha  Agency.     Currency  to -  ....     122.00 

Aug.  31.    267.     Expense.     Stamps   3.24 

Aug.  31.     267.     Mine  Gen.  Expense.     Stamps 2.20 

Oct.    23.     299.     Expense.     Charity  "W.  W.  Home" 2.00 

Dec.    31.     337.     Expense.     Stamps   9.08 

1906. 

Jan.    31.     355.     Expense.     Stamps   1.85 


76  RGNN'S  PRACTICAL  AUDITING 

1906.     Folio.  Name  of  Account.  Amount. 

Feb.  28.    371.    Expense.    Stamps   $      3.42 

Mch.  26.    385.     Mine  Plant  A/c.     Ck.  to  -        -  1000.00 

June  29.      49.     Expense.     Stamps    1.72 

July     5.      61.     Expense. 50.00 

The  Revenue  Stamps  are  considered  as  Cash  on  hand  until  used, 
and  when  used  the  details  of  same  should  be  entered  on  the  Monthly 
Petty  Expense  Vouchers. 

CASH  BOOK  ADDITIONS  AND  POSTINGS. 

All  additions  were  verified  and  all  postings  checked  from  Ledgers, 
only  one  error  being  found,  as  below: — 

Cash  Book  Fo.  289,  charge  of  $11.05  to  Dock  No.   1   Insurance 
A/c.  was  posted  to  Dock  No.  2  Insurance  Account. 

JOURNALS. 
VOUCHERS. 

An  attempt  was  made  to  verify  all  credits  to  personal  accounts 
where  the  amounts  were  charged  against  the  impersonal  accounts. 

Invoices  were  seen  for  nearly  all  credits  for  purchases,  but  after 
examining  the  Bookkeeper's  memos.  on  file,  we  find  a  very  large 
number  of  credits  for  allowances,  etc.,  for  which  no  memoranda  are 
filed,  and  in  fact,  many  of  those  seen  were  of  little  value  as  they  had 
not  been  approved.  We  recommend  the  use  of  a  form  of  Journal 
Voucher  for  all  allowances  and  special  credits,  which  can  be  written 
by  your  bookkeepers  and  filed  in  numerical  order.  The  Journal  en- 
tries will  not  then  require  to  be  written  in  detail  as  at  present,  as  each 
entry  will  indicate  the  voucher  number.  The  vouchers  will,  of  course, 
be  approved  by  whoever  authorizes  the  entries. 

DOCK  VOUCHERS  AND  PAY-ROLLS. 

We  carefully  examined  all  Dock  Vouchers,  comparing  them  with 
the  corresponding  journal  entries  and  found  them  in  good  order.  A 
number  of  the  Dock  Pay-Rolls  were  also  scrutinized  and  compared 
with  credits  for  same  on  Journal  and  found  to  agree.  We  did  not 
examine  all  Dock  Pay-Rolls  as  we  understand  they  are  carefully 


A   SPECIMEN  REPORT  77 

checked  over  by  your  bookkeepers  before  being  credited  to  the  Agen- 
cies. We  suggest  the  desirability  of  having  the  Superintendents  at 
the  Agencies  certify  to  the  correctness  of  the  Pay-Rolls,  before  they 
are  forwarded  to  the  Chicago  Office. 

MINE  NO.  1  PAY-ROLLS. 

The  Mine  Pay-Roils  were  found  to  be  made  out  by  your  Mine 
Clerk  and  the  extensions  and  additions  of  same  verified  by  the  book- 
keepers in  the  Chicago  Office,  but  there  is  absolutely  no  check  as  to 
the  names  entered  on  the  rolls  and  the  earnings  credited  to  each. 

The  Pay-Rolls  should  be  approved  by  the  Foremen  and  Mine 
Superintendent,  or  if  this  is  impracticable,  alternate  Time  Books  could 
be  kept  for  each  Department  or  division  and  these  should  be  approved 
by  the  Foremen  and  forwarded  to  the  Chicago  Office  with  the  Pay- 
Roils. 

If  it  is  not  considered  feasible  to  have  Departmental  Pay-Rolls, 
which  the  employes  can  sign  on  receiving  their  pay,  loose  receipts 
should  be  taken  and  forwarded  to  the  Chicago  Office,  where  they 
could  be  compared  with  the  Pay-Roils  at  intervals. 

ADDITIONS  AND  POSTINGS  OF  JOURNAL  ENTRIES. 

All  additions  in  the  various  Journals  were  carefully  verified  and 
the  posting  of  all  charges  to  impersonal  accounts  and  of  credits  to  all 
accounts  was  checked  and  found  correct. 

LEDGERS. 

All  of  the  Ledger  Accounts  were  verified  and  the  Trial  Balances 
as  at  April  1st,  1905,  March  31st,  1906,  and  Sept.  30th,  1906,  were 
proven  correct. 

The  examination  of  the  accounts  as  kept  prior  to  March  31st,  1906, 
in  a  large  General  Ledger  and  a  Dock  Ledger  required  considerable 
time,  and  the  ledgers  now  used  are  more  satisfactory.  We  consider 
that  the  keeping  of  accounts  with  the  employes  for  their  regular 
monthly  salaries,  is  quite  unnecessary,  and  one  voucher  could  be 
made  each  month  to  cover  the  Office  Pay-Roll,  to  which  would  be 
attached  the  individual  receipts  of  the  employes. 


78  RENN'S  PRACTICAL  AUDITING 

VOUCHER  SYSTEM. 

The  present  method  of  filing  vouchers  and  invoices  in  separate 
places,  the  entering  of  credits  in  the  Journals  for  all  purchases  and 
the  consequent  keeping  of  many  individual  creditors'  accounts,  in- 
volves considerable  clerical  work  which  would  be  obviated  by  the  use 
of  a  modern  Voucher  Journal  or  Record.  Such  a  Record  would  have 
separate  columns  for  the  charging  of  purchases,  etc.,  to  the  various 
merchandise  and  expense  accounts  in  monthly  totals,  and  all  credits 
would  be  posted  in  a  monthly  total  to  an  Audited  Vouchers  Account, 
except  where  an  individual  credit  account  was  desirable  for  some 
special  reason.  While  the  requirements  of  your  business  would  prob- 
ably demand  some  further  study  before  a  new  Voucher  System  is 
devised,  we  believe  considerable  improvement  can  be  made  in  this 
direction. 

DISTRIBUTION  OF  ACCOUNTS. 

While  we  found  many  distributive  accounts  are  kept  for  costs  at 
Docks  and  Mine,  a  careful  examination  of  the  various  accounts 
revealed  an  apparent  lack  of  method  in  making  the  distributions, 
which  has  reduced  the  value  of  the  same  to  some  extent. 

We  particularly  noticed  the  distribution  of  purchases  for  Supplies 
and  Repairs  at  the  Docks,  which  seem  to  have  been  charged  to  the 
Discharging,  Loading  and  other  accounts  as  was  considered  correct 
by  the  Bookkeepers  there. 

The  charging  of  miscellaneous  tools,  etc.,  to  a  Personal  Property 
Account  was  erroneous,  as  this  practice  tends  to  create  a  fictitious 
asset,  owing  to  most  of  the  purchases  being  in  the  nature  of  renewals 
and  replacements  of  worn  out  property. 

In  the  Mine  Accounts  we  found  many  maintenance  expenses 
charged  to  Improvement  Account  and  some  permanent  improvements 
charged  to  the  Expense  Accounts.  New  Machinery  was  charged  in 
some  instances  to  Plant  Account  and  in  others  to  Improvement  Ac- 
count. 

We  are  of  the  opinion  that  considerable  improvement  can  be 
made  in  this  direction,  which  would  greatly  increase  the  value  of  the 
accounts,  but  the  particular  requirements  of  your  business  will  demand 
further  investigation  by  us,  before  we  could  make  specific  recom- 
mendations as  to  the  most  desirable  changes. 


A   SPECIMEN  REPORT  79 

The  charge  of  $50.00  per  month  made  against  The  Retail  Coal  Co. 
for  office  work  in  Chicago  Office,  seems  to  be  rather  low,  and  if  the 
charge  is  not  approximately  correct,  the  stockholders  of  The  Retail 
Coal  Co.  profit  at  the  expense  of  The  Coal  Mining  &  Shipping  Co. 

DEPRECIATION. 

This  subject  requires  careful  consideration  in  almost  every  line 
of  business,  particularly  where  the  cost  of  replacements,  repairs  and 
temporary  improvements  are  carried  to  an  Improvement  or  Plant 
Account. 

We  presume  the  amount  written  off  monthly  for  Royalty  is  con- 
sidered ample  for  Depreciation  of  Mines,  but  the  question  of  writing 
off  certain  percentages  on  other  assets,  such  as  Machinery,  Improve- 
ments, etc.,  should  be  given  careful  thought. 

It  would  be  advisable  to  have  an  appraisement  made  in  the  near 
future  of  the  property  at  the  mines,  to  determine  whether  the  book 
values  are  approximately  correct,  and  if  not,  adjusting  entries  should 
be  made. 

RECEIVING  BOOKS. 

A  correct  Receiving  Book,  the  need  of  which  at  the  Mines  is 
icf erred  to  in  the  first  part  of  this  Report,  would  consist  of  a  record 
book  ruled  with  columns  in  which  to  enter  details  of  purchases.  The 
headings  of  the  columns  should  be  as  follows: — 

Date  of  Receipt. 

From  Whom  Received. 

Description  of  Articles. 

Remarks. 

Date  Invoice  Approved  (or  sent  to  Chicago  Office). 

Such  a  record  book  carefully  kept  will  be  of  service  in  checking 
up  all  invoices  and  will  practically  prevent  duplicate  bills  being 
passed. 

GENERAL  REMARKS. 

With  the  exception  of  a  rather  large  number  of  erasures  in  the 
various  books,  which  should  not  be  permitted,  the  office  force  deserves 
commendation  for  neat  and  accurate  work. 

Every  facility  was  afforded  us  by  the  staff  during  our  investi- 
gation. Respectfully  submitted, 

(Signed)     GEORGE  B.  RENN. 


80 


RENN'S  PRACTICAL  AUDITING 


ACCOUNT 

THE  COAL  MINING  AND 
BALANCE  SHEET 

ASSETS. 

CASH   $  33071.47 

BILLS  RECEIVABLE $    4550.00 

Less :     Bills  Discounted    4393.93 

156.07 

ACCOUNTS  RECEIVABLE:— 

,  Stock  Account   160.00 

Old  Coal  Co.  Profit  and  Loss  Account....       1880.63 
Sundry  Accounts   75976.55 

78017.18 

AGENCY  ACCOUNTS:— 

Butte,  Mont 11610.59 

Seattle,  Wash 152.36 

Omaha,  Neb 51210.61 

Denver,   Colo 23102.91 

86076.47 

SPECIAL  ACCOUNTS  14655.43 

CONSIGNMENT  ACCOUNTS:— 

Name    697.13 

Name    74.53 

771.66 

SALARY  ACCOUNTS:— 

Name    10.00 

Name    76.60 

Name    269.40 

356.00 

TELEPHONE  COUPONS   121.89 

STOCK  as  per  Inventory: — 

Coal  at  Mines  7328.80 

Coal  at  77th  St.  Yard 1307.27 

Coal  at  Dock  No.  1 48393.05 

Coal  at  Dock  No.  2 38373.91 

Wood  at  Saw  Mill 2795.54 

Supplies  at  Mines   527.65 

98726.22 

REAL  ESTATE,  PLANT,  IMPROVEMENTS, 

ETC.:— 

Mine  No.  1  Real  Estate  and  Plant 67597.01 

Mine  No.  1  Improvements 25733.14 

Saw  Mill  1745.10 

Personal  Property  Dock  No.  1 322.18 

Personal  Property  Dock  No.  2 137.03 

95534.46 

FURNITURE  AND  FIXTURES  658.30 

$408145.15 


A   SPECIMEN  REPORT 


81 


NO.  1. 

SHIPPING  CO.,  CHICAGO. 

As  on  March  31st,  1906. 

LIABILITIES. 

CAPITAL  STOCK   $250000.00 

Less:     Treasury  Stock    49100.00 

$200900.00 

BILLS  PAYABLE  110202.29 

ACCOUNTS  PAYABLE:— 

,  Stock  Account  18.15 

Name    97.75 

Name    15.66 

Mine  No.  1  Order  Account 1221.42 

,  Agent 4508.84 

Retail  Coal  Co 33906.46 

Sundry  Creditors   25101.08 

64869.36 

SALARY  AND  COMMISSION  ACCOUNTS:— 

Name    370.60 

Name    42.65 

Name    75.00 

Name    148.96 

637.21 

ACCRUED  ACCOUNTS:— 

Freight    9408.75 

Mine  No.  1  Pay-Roil 4485.18 

Saw  Mill   Pay-Roll....  316.12 

14210.05 

SURPLUS  (as  per  Account  No.  2) 17326.24 


$408145.15 


82 


RENN'S  PRACTICAL  AUDITING 


ACCOUNT 

THE  COAL  MINING  AND 
GENERAL  PROFIT  AND  LOSS  ACCOUNT 


CHARGES. 
Coal  on  hand  at  Mine $    2581.17 


1905. 
Apr.     1.    INVENTORY. 

1906. 

Mch.  31.    PURCHASES    AND    COST    OF    PRODUC- 
TION:— 

Outside    Purchases   of   Coal   and 

Wood  $279065.85 

Coal  from  Mine  No.  1 . .  .  123468.39 


Wood  from  Saw  Mill  (see  Contra) 

Wood  purchased $  3514.00 

Cutting    and    Loading 

Wood  .  1135.51 


Coal  for  77th  St.  Yard. $1873.99 
Unloading  and  Switching 

at  77th  St..  51.00 


1853.97 


4649.51 


1924.99 

SELLING  AND  GENERAL  EXPENSES:— 
Rent  of  Chicago  Office.$  1200.00 
Salaries  of  Officers. . . .   13200.00 
Salaries    of    Employes 

at  Chicago  office..     9816.93 


$24216.93 

Less  1/3  charged  to 
Dock  A/c.  and  1/3 
charged  to  Mine 
A/c 16064.62  $ 

Traveling  Expenses  

Stationery  and  Printing 

Telephone  and  Telegraph  $818.- 

86,  Postage  $791.75 

Adv.  and  Subscription  to  Coal 

Journals  

Commercial  Agencies 

Commissions  

Supplies  at  Saw  Mill 

Maps  and  Shipping  Guides.... 

Coal  Association  Dues 

Chicago  Shippers  Assn 

Sundries  . 


8152.31 

2034.98 
1016.99 

1610.61 

492.55 

233.83 

141.73 

32.08 

54.50 

40.00 

28.00 

388.62 


410962.71 


14226.20 


Carried  forward  $427770.08 


A   SPECIMEN  REPORT 


83 


NO.  2. 

SHIPPING  CO.,  CHICAGO. 

for  the  year  ended  March  31st,  1906. 


1906. 
Mch.  31. 


CREDITS. 

INVENTORIES:— 

Coal  at  Mines   $    7328.80 

Wood  at  Saw  Mill 2795.54 

Coal  in  77th  St.  Yard 1307.27 

$  11431.61 

SALES:— 

Coal  and  Wood  sold  through 

General  Coal  Account  $430802.98 

Coal  sold  from  77th  St.  Yard. . . .        617.72 

Wood  sold  to  Coal  A/c.  from 

Saw  Mill  1853.97 

Overcharge  Account  653.87 

$433928.54 

Less  Shortage  and  Al- 
lowances    $1090.75 

Car  Service  234.00 

1324.75 

432603.79 

UNCLAIMED  CREDITS 603.94 

COMMISSIONS  from  Retail  Coal  Co 2133.00 

MINE  NO.  1  PROFIT  AND  LOSS  ACCOUNT, 

Net  Gain  at  Mine  per  Account  No.  6 262.77 


Carried  forward  $447035.11 


84  RENN'S  PRACTICAL  AUDITING 

ACCOUNT 

THE  COAL  MINING  AND 
GENERAL  PROFIT  AND  LOSS  ACCOUNT 

Brought  forward  $427770.08 

PERSONAL  PROPERTY  TAXES  1905 298.99 

INSURANCE,  Saw  Mill  79.25 

LEGAL  EXPENSE,  Saw  Mill  Account 15.25 

COAL,  one  car  sacrificed  for  Freight 48.00 

DOCK  GENERAL  PROFIT  AND  LOSS  A/c. 

Net  Loss  at  Docks  (A/c.  No.  3) 403.04 

BALANCE,  Profit  carried  down 18420.50 

$447035.11 


INTEREST  ON  BORROWED  CAPITAL. 

(Less  Interest  and  Discount  earned) $      883.48 

DONATIONS  AND  CHARITY 383.01 

BAD  DEBTS  CHARGED  OFF:— 

Name    $1.10 

Name    2.00 

3.10 

SURPLUS    17326.24 

$  18595.83 


A   SPECIMEN  REPORT 


85 


NO.  2. — Continued. 

SHIPPING  CO.,  CHICAGO. 

for  the  year  ended  March  31st,  1906. 


Brought  forward  . 


$447035.11 


$447035.11 


BALANCE,  Profit  brought  down $  18420.50 

B.  &  O.  FUEL  CO.  ACCOUNTS 169.90 

BAD  DEBTS  RECOVERED:— 

Name   $0-47 

Name    4.96 

5.43 


$  18595.83 


86 


RZNN'S  PRACTICAL  AUDITING 


LOSSES. 

DOCK  NO.  1  PROFIT  AND  LOSS  ACCOUNT. 

(See  Account  No.  4) $    7117.61 

OMAHA  AGENCY  543.29 

SUNDRY  CHARGES:— 

Proportion  of  Chicago   Office  Salaries  and 

Rent   $8032.31 

Salary  of  San  Francisco  Agent 1200.00 

Traveling  Expenses  (Officers)   704.65 

Telegraph  Bill  of  San  Francisco  Agent 188.95 

Printing  and  Stationery  163.36 

Collection  Expenses  31.66 

Sundries    19.37 

10340.30 

BALANCE,  Profit  on  Operating  carried  down..  2713.89 

$20715.09 

INTEREST  ON  BORROWED  CAPITAL,  less 

Interest  and  Discount  earned $2958.93 

DONATIONS    152.25 

• 

BAD  DEBTS:— 

Name    5.75 

$3116.93 


A   SPECIMEN  REPORT 


87 


NO.  3. 

SHIPPING  CO.,  CHICAGO. 

for  the  year  ended  March  31st,  1906. 

GAINS. 

DOCK  NO.  2  PROFIT  AND  LOSS  ACCOUNT. 

(See  Account  No.  5.)  

DENVER  AGENCY.   (90  per  cent  of  Net  Profit.) 

SUPERIOR  COAL  ACCOUNT.  (Details  shown 
in  Report.)    

STEAMER  FUEL  ACCOUNT 


$    8033.37 
697.96 

8322.68 
3661.08 


$  20715.09 


BALANCE,  Profit  brought  down 

LOSS  carried  to  General  Profit  and  Loss  Ac- 
count.   (See  Account  No.  2) 


$    2713.89 
403.04 


$    3116.93 


RENN'S  PRACTICAL  AUDITING 


ACCOUNT 

THE  COAL  MINING  AND 
DOCK  NO.  1  PROFIT  AND  LOSS  ACCOUNT 

1905  CHARGES. 

Apr.    1.    INVENTORY:— 

Coal  on  hand   $    8500.15 

1906. 

Mch.31.     PURCHASES      AND      COST      OF 
HANDLING:— 

Cargo  Coal  purchased  $114787.68 

Car    Coal    9743.09 

A.  &  B.  Coal   5031.13 

Retail  Coal  purchased  from  A.  & 

B.  Co 15522.72 

Retail  Coal  purchased  from  Out- 
side    '..       5809.53 

Freight  on  Cargo  Coal 32064.52 

Freight  on   Rail   Coal    299.16 

Switching    9.00 

Discharging  Bituminous.  (See  Re- 
port)            6691.84 

Discharging  Anthracite.  (See  Re- 
port)           2645.17 

Loading    Bituminous.    (See    Re- 
port)            8462.41 

Loading    Anthracite.      (See     Re- 
port)          7936.18 

$209002.43 

SELLING    AND    GENERAL    EX- 
PENSES:— 

Commissions: — 

Bituminous   Car   Coal 

Sales    $2617.53 

Anthracite    Car    Coal 

Sales    812.70 

$3430.23 

Traveling  Expenses    465.26 

Salaries    2525.00 

General  and  Dock  Expense.    (See 

Report)    6596.47 

Teaming 2558.02 

Postage,  Printing  and  Stationery.         185.73 
Telephone  and  Telegraph    164.35 

15925.06 

TAXES  AND  INSURANCE  1785.70 

CARGO   INSURANCE    275.58 

$235488.92 

BALANCE,  Loss  brought  down  ....  $6507.08 

INTEREST  ON  BORROWED 
CAPITAL  (less  Interest  and  Dis- 
count earned)  610.53 

$7117.61 


A   SPECIMEN  REPORT  89 


NO.  4. 

SHIPPING  CO.,  CHICAGO. 

for  the  year  ended  March  31st,  1906. 

CREDITS. 
1906. 
Mch.31.     INVENTORY:— 

Coal  on  hand $  48393.05 

SALES:— 

Bituminous  Coal  sold 

Customers    $121730.38 

Anthracite    Coal    sold 

Customers    21383.14 


$143113.52 
Less:  Sales  to  Retail.     36687.66 

$106425.86 

Retail    Coal    sold    to 

Customers    62864.84 

Cargo    Coal    sold    to 

Customers    80.79 


$169371.49 
Less: — 

Bituminous  Coal  Sales 
Discount       and 

Shortage $14.60 

Overage  and  Shortage  78.43 

Retail    Discount    and 

Shortage  94.12 

187.15 

169184.34 

DISCHARGING  BITUMINOUS 
AND  LOADING  BITU- 
MINOUS for  others  187.60 

ANTHRACITE    COMMISSION..  10735.01 

SUNDRY  CREDITS:— 

Unclaimed  Freight    $260.47 

Steam  sold  35.70 

Gain    in     Inventory    of     Retail 

Coal    18.32 

314.49 
FOREIGN      COAL      ACCOUNT. 

(See  Report) 167.35 

BALANCE,  Loss  carried  down 6507.08 


$235488.92 

BALANCE,  Net  Loss  carried  to 
Dock  General  Profit  and 
Loss  Account  $7117.61 

$7117.61 


90 


RENN'S  PRACTICAL  AUDITING 


ACCOUNT 

THE  COAL  MINING  AND 
DOCK  NO.  2  PROFIT  AND  LOSS  ACCOUNT 

CHARGES. 
1905 

Apr.  1.    INVENTORY:— 

Coal  on  hand   : $1732921 

1906 

Mch.31.    PURCHASES    AND     COST    OF 
HANDLING:— 

Cargo  Coal  Account,  Cargo 

Purchases  $131364.23 

Cargo  Coal  Account,  Car  Pur- 
chases    4526.03 

Retail  Coal  purchased  from 

A.  &  B.  Co 3125.47 

Retail  Coal  purchased  from 

Outside  413.31 

Cargo    Freights    31747.94 

Switching    433.00 

Discharging  Bituminous.  (See 

Report)  12609.05 

Discharging  Anthracite.  (See 

Report)  2037.94 

Loading  Anthracite.  (See  Re- 
port)    3012.44 

Loading  Bituminous.  (See  Re- 
port)    7119.97 

196389.38 

SELLING  AND  GENERAL   EX- 
PENSES:— 

Commissions : — 

Bituminous     Car 

Coal  Sales  ....$1511.15 
Anthracite     Car 

Coal  Sales  ....     580.31 

$    2091.46 

Traveling  Expenses    194.96 

Salaries 2158.32 

General     and     Dock     Expense. 

(See  Report)  5553.66 

Teaming 85.41 

Postage,  Printing  and  Station- 
ery    187.76 

Telegraph  and  Telephone 115.46 

10387.03 

TAXES  AND  INSURANCE 730.53 

CARGO   INSURANCE    259.71 

BALANCE,  Profit  carried  down..  8414.27 

$233510.13 


A   SPECIMEN  REPORT 


91 


NO.  5. 

SHIPPING  CO.,  CHICAGO. 

for  the  year  ended  March  31st,  1906. 


1906. 

Mch.  31.     INVENTORY:— 
Coal  on  hand  . 


CREDITS. 


SALES:— 

Anthracite  Coal  Sales 

to  Customers $  26127.46 

Bituminous  Coal  Sales 

to  Customers  .     .  155071.30 


$181198.76 
Less:  Sales  to  Retail.      8837.46 


Retail   Sales   to   Cus- 
tomers   , 


Less: — 

Bituminous     Coal 

Discount   and 

Shortage  . . .  .$ 
Retail       Discount 

and   Shortage 
Overage       and 

Shortage     . . . 


145.04 

33.22 

110.29 


$  38373.91 


$172361.30 

14213.49 

$186574.79 


288.55 


DISCHARGING    Bituminous    Car- 
goes      $    3604.34 

DISCHARGING    Anthracite     Car- 
goes      863.43 

(Unloading   boats    for    others)     

ANTHRACITE  COMMISSION  . 


186286.24 


4467.77 
4382.21 


$233510.13 


92  RENN'S  PRACTICAL  AUDITING 

ACCOUNT 

THE  COAL  MINING  AND 
DOCK  NO.  2  PROFIT  AND  LOSS  ACCOUNT 

INTEREST  ON  BORROWED 
CAPITAL  (less  Interest  and 
Discount  earned)  $  766.19 

PROFIT  CARRIED  TO  DOCK 
GENERAL  PROFIT  AND 
LOSS  ACCOUNT.  (See  Ac- 
count No.  3)  8033.37 

$    8799.56 


A   SPECIMEN  REPORT  93 

NO.  5. — Continued. 

SHIPPING  CO.,  CHICAGO. 

for  the  year  ended  March  31st,  1906. 

BALANCE,  Profit  brought  down..  $    8414.27 
PLANT  ACCOUNT,   Dock    Prop- 
erty re-sold   275.00 

DOCK     OVERAGE     ACCOUNT, 

Season  1904-1905   .  110.29 


$    8799.56 


94 


RENN'S  PRACTICAL  AUDITING 


ACCOUNT 

THE  COAL  MINING  AND 
MINE  NO.  1  PROFIT  AND  LOSS  ACCOUNT 

1905.  CHARGES. 

Apr.  1.    INVENTORIES:— 

Supplies  and  Merchandise   $      345.48 

Powder    170.37 

$      515.85 

1906 

Mch.il.    SUPPLIES    AND    SUNDRY    PUR- 
CHASES:— 

Powder    $  5271.19 

Oil  (lubricating  and  illuminating)  1175.30 

Water 353.70 

Switching  Coal  69.22 

Miscellaneous  Supplies 626.37 

Hay  and  Feed 1331.11 

Sawdust  49.00 

Coal  purchased  from   other  oper- 
ators      3262.24 

12138.13 

LABOR:— 

Mining  $  65687.16 

Day  Work   28053.98 

Yardage    6086.18 

Horsebacks  and  Room  Turning.       2002.86 

101830.18 

SUNDRY  EXPENSES:— 

Proportion     of     Chicago     Office 

Rent  and  Salaries   $  8032.31 

Fuel   used    (including   some    coal 

donated)    2370.25 

Teaming,  Hauling  and  Grading..  763.98 

Horseshoeing,  Veterinary,  etc.   . .  50.40 

Harness  Repairs  97.80 

Freight,  Switching  and  Express.  739.68 

Traveling  Expenses,  etc 621.78 

Telegraph  and  Telephone    109.73 

Postage,  Printing  and  Stationery.  93.22 

Coal   Associations    69.95 

Sundries    251.18 

13200.28 

MAINTENANCE.     (See   Report   for 

details)   2943.30 

TAXES   AND    INSURANCE.     (See 

Report)    1265.42 

ROYALTY.    (Credited   to    Plant  Ac- 
count)       3772.19 

SPECIAL  CHARGES:— 

Consulting  Mining  Engineer $       344.33 

Legal  Expense   280.95 

625.28 

BALANCE,   Profit  carried  down 2872.90 

$139163.53 


A   SPECIMEN  REPORT 


95 


NO.  6. 

SHIPPING  CO.,  CHICAGO. 

for  the  year  ended  March  31st,  1906. 


1906. 
Mch.31. 


CREDITS. 

INVENTORIES:— 

Supplies  and  Merchandise $      517.51 

Powder    10.14 

$      527.65 

SALES:— 

Coal  to  General  Coal  Account. .  .$123468.39 

Coal  to  Miners   1509.72 

Coal  to  Sundry  Customers 1707.69 

Powder  to  Sundry  Customers. . . .  1.75 

Powder  to  Miners  8785.00 

Supplies  and  Merchandise 1283.80 

Scrap  Iron  sold   38.12 

136794.47 

MINE  ORDER  DISCOUNT 524.15 

RENTS  82.25 

DIVIDENDS  FROM  COAL  ASSN.  1223.30 
PROFIT       ON       CASH       SALES 

THROUGH  COAL  ASSN..  11.71 


$139163.53 


RENN'S  PRACTICAL  AUDITING 


1906. 
Mch.  31. 


ACCOUNT 

THE  COAL  MINING  AND 
MINE  NO.  1  PROFIT  AND  LOSS  ACCOUNT 

CHARGES. 

INTEREST   ON   BORROWED   CAPITAL 

(less  Interest  and  Discount  earned) $     1721.53 

BAD  DEBTS  CHARGED  OFF:— 

Name    $43.75 

Name    3.75 

Name    5.00 

Name    5.90 

58.40 

DONATIONS   (except  Coal  donated) 42.38 

MACHINERY  AND  IMPROVEMENTS  (see 

Report)  229.22 

LOSS,  SEASON  1904-1905.  (Invoice  for  Pow- 
der omitted  from  Liabilities  March,  1905)  . .  558.60 

PROFIT  carried  to  General  Profit  and  Loss 

Account  (see  Account  No.  2) 262.77 

$    2872.90 


A   SPECIMEN  REPORT 


97 


NO.  6.— Continued. 

SHIPPING  CO.,  CHICAGO. 

for  the  year  ended  March  31st,  1906. 


1906. 


CREDITS. 


Mch.  31.    BALANCE,  Profit  brought  down 


2872.90 


$    2872.90 


RENN'S  PRACTICAL  AUDITING 


ACCOUNT 

THE  COAL  MINING  AND 
SUMMARIZED  TRIAL  BALANCE, 

ASSETS. 
CASH   $  17639.96 

ACCOUNTS  RECEIVABLE:— 

Name   $        27.85 

77th  St.  Yard  Cash  Sales  Account 15.00 

Accident  and  Guaranty  Co 125.00 

,  Stock  Account 248.00 

Coal  Co 303.33 

,  Dividend  Account 884.00 

Sundry  Debtors  A.  and  B.  Ledger 5590.83 

Sundry  Debtors  Personal  Ledger 110273.79 

117467.80 

AGENCY  ACCOUNTS:— 

Butte,  Mont 9973.10 

Seattle,  Wash 3595.16 

Omaha,  Neb 66579.01 

Denver,   Colo 19083.75 

99231.02 

SPECIAL  ACCOUNTS  2280.60 

CONSIGNMENT  ACCOUNTS:— 

Name    141.95 

Name    470.03 

611.98 

SALARY  ACCOUNTS:— 

Advances  on  Pay  Roll  Mine  No.  1 12.72 

Name    130.21 

Name    290.30 

433.23 
STOCK,  as  per  Book  Values:— 

Coal  at  Mines 4517.43 

Coal  at  77th  St.  Yard 1846.19 

Coal  at  Dock  No.  1 79468.14 

Coal  at  Dock  No.  2 83411.16 

Wood  at  Saw  Mill 4973.27 

174216.19 

REAL  ESTATE,  PLANT,  IMPROVEMENTS, 

ETC.:— 

Mine  No.  1  Real  Estate  and  Plant 71528.38 

Mine  No.  1  Improvements 28879.63 

Saw  Mill   1805.46 

Personal  Property  Dock  No.  1 550.20 

Personal  Property  Dock  No.  2 296.48 

Personal  Property  77th  St.  Yard 74.50 

103134.65 

FURNITURE  AND  FIXTURES 688.30 

$515703.73 


A  SPECIMEN  REPORT 


99 


NO.  7. 

SHIPPING  CO.,  CHICAGO. 

As  on  September  30th,  1906. 

LIABILITIES. 

CAPITAL  STOCK $250000.00 

Less:     Treasury  Stock 49100.00 

$200900.00 

BILLS  PAYABLE 190382.67 

ACCOUNTS  PAYABLE:— 

Name    15.66 

Name   37.50 

Name    250.00 

Old  Coal  Co.  Profit  and  Loss  Account 1675.88 

Retail  Coal  Co 18999.44 

Sundry  Creditors   73292.72 

94271.20 

SALARY  AND  COMMISSION  ACCOUNTS:— 

Name  500.00 

Name  250.00 

Name  150.00 

Name  23.00 

Name  148.96 

Name  100.00 

Name  50.00 

1221.96 

ACCRUED  ACCOUNTS:— 

Freight 2471.55 

Mine  No.  1  Pay  Roll 4934.53 

Mine  No.  1  Order  Account 1698.66 

Saw  Mill  Pay  Roll 171.24 

9275.98 

SUMMARY  OF  PROFIT  AND  LOSS  ACCOUNTS..  19651.92 


$515703.73 


100  RENN'S  PRACTICAL  AUDITING 

ACCOUNT  NO.  8. 

This  account  consists  of  a  schedule  of  the  debtors'  accounts  car- 
ried in  the  A.  &  B.  Ledger,  and  the  Personal  Ledger.  The  items  are 
assembled  under  headings  of  "folio,"  "name"  and  "amount,"  and  are 
also  classified  under  "good,"  "doubtful"  or  "bad."  The  total  of  these 
accounts  agrees  with  the  items  in  Account  No.  7,  which  represent 
them. 

It  is  not  considered  necessary  to  reproduce  this  schedule  in  detail. 

ACCOUNT  NO.  9. 

This  is  a  schedule  of  the  Sundry  Creditors  shown  in  total  in  Ac- 
count No.  7.  The  items  are  assembled  under  headings  of  "folio," 
"name"  and  "amount." 


PART  III 
SPECIAL  AUDITS 

FIRST  AUDIT  OF  BOOKS  OF  CORPORATIONS 

In  auditing  the  affairs  of  a  corporation  for  the  first  time  more 
is  involved  than  a  mere  auditing  of  the  trade  books  of  account, 
for  the  process  of  organization  and  later  corporate  acts  are  also 
subjects  for  inspection.  These  details  will  be  found  in  the  cor- 
poration books,  and  it  is  essential  that  the  auditor  possess  a  full 
understanding  of  what  constitutes  a  set  of  these  records  and  the 
purposes  for  which  they  are  used.  A  complete  set  comprises  the 
minute  book,  subscription  book,  stock  certificate  book,  transfer 
book,  stock  ledger,  and  dividend  book. 

Minute  Book. 

In  this  book  are  recorded  the  transactions  of  all  meetings  of 
stockholders,  and  of  the  board  of  directors.  The  by-laws  are 
also  entered  in  it,  and  copies  of  all  corporate  papers,  including 
the  charter. 

Subscription  Book. 

This  book  contains  a  list  of  subscriptions  to  the  capital  stock, 
showing  the  names  of  subscribers,  and  the  number  and  par  value 

of  the  shares  subscribed  for  by  each. 
101 


102  RENN'S  PRACTICAL  AUDITING 

Stock  Certificate  Book. 

This  book  is  composed  of  blank  certificates  and  stubs.  The 
certificates  are  issued  to  stockholders  as  evidence  that  their  sub- 
scriptions have  been  paid  in  full,  and  from  entries  on  the  stubs 
postings  are  made  to  the  stock  ledger,  crediting  each  stockholder 
with  the  number  of  shares  held  by  him. 

Transfer  Book. 

This  book  contains  printed  forms,  with  blanks  to  be  filled  in 
transferring  stock  from  one  person  to  another.  Through  the 
medium  of  these  forms  a  stockholder  may  transfer  all  or  part  of 
his  holdings.  The  stubs  of  the  transfer  book  become  the  exclu- 
sive journal  to  the  stock  ledger,  after  the  original  issue  has  been 
entered  from  the  certificate  book. 

Stock  Ledger. 

As  indicated  above,  postings  to  this  book  are  made  in  the  first 
instance  from  the  stubs  of  the  stock  certificate  book  to  the  credit 
of  the  individual  stockholders.  Thereafter  the  entries  are  made 
from  the  stubs  of  the  transfer  book,  and  they  consist  always  of 
an  even  transfer  as  regards  debit  and  credit  amounts.  Therefore 
the  credit  balance  of  the  stock  ledger,  plus  Treasury  Stock,  should 
always  agree  with  Capital  Stock  balance  in  the  general  ledger. 
This  book  serves  as  a  convenient  register  of  stockholders  in  the 
corporation,  since  it  contains  the  names  of  all  shareholders  and 
the  number  of  shares  held  by  each. 

Dividend  Book. 

In  this  book  are  written  the  names,  addresses  and  holdings  of 
each  stockholder  who  has  a  credit  balance  in  the  stock  ledger  at 
the  time  a  dividend  is  declared.  It  serves  as  a  convenient  record 
for  the  distribution  of  dividends. 


SPECIAL  AUDITS  103 

Frequently  small  corporations  dispense  with  the  less  important 
of  these  records,  and  it  is  often  the  case  that  only  a  minute  book 
and  a  stock  certificate  book  are  kept. 

The  auditor  should  make  a  careful  preliminary  study  of  the 
charter  and  by-laws  of  the  corporation  to  determine  the  priv- 
ileges, as  well  as  the  limitations,  under  which  the  company  is 
operating.  Next  he  should  read  the  minutes  of  all  meetings  of 
the  directors,  to  ascertain  what  special  acts  have  been  authorized. 
Having  acquainted  himself  with  these  facts  he  will  be  in  a  posi- 
tion to  examine  the  various  transactions  incident  to  organization 
as  shown  in  the  corporation  books,  and  later  the  operating  en- 
tries in  the  regular  books  of  account. 

The  stubs  in  the  stock  certificate  book  are  to  be  checked  into 
the  stock  ledger,  and  a  schedule  is  to  be  drawn  from  the  stubs 
classifying  the  issue  under  "preferred"  or  "common."  From 
this  may  be  ascertained  whether  the  shares  have  been  issued  in 
accordance  with  the  articles  of  incorporation,  as  regards  the  two 
classes. 

At  the  same  time  it  will  be  shown  whether  the  issue  is  within 
the  limit  authorized  by  the  charter.  This  is  also  a  good  time  for 
the  auditor  to  assure  himself  that  the  total  of  the  outstanding- 
stock  is  fully  stated  in  the  general  ledger. 

If  any  transfers  have  been  made  the  stubs  in  the  transfer 
book  are  to  be  checked  into  the  stock  ledger,  and  it  is  to  be  noted 
whether  the  original  certificates  (now  canceled)  have  been  re- 
attached  to  their  stubs  in  the  stock  certificate  book. 

It  is  next  in  order  to  ascertain  what  consideration  was  re- 
ceived by  the  corporation  in  exchange  for  its  capital  stock.  There 
are  two  methods  by  which  subscriptions  may  be  settled — one  is 
the  direct  payment  of  cash;  the  other  is  through  exchange  of 
some  valuable  consideration,  such  as  services  rendered,  or  trans- 
fer of  property. 

It  is  of  the  first  importance  that  the  cash  proceeds  from  capital 
stock  issues  should  appear  in  the  regular  cash  book,  therefore 


104  RENN'S  PRACTICAL  AUDITING 

the  auditor  should  check  from  the  cash  book  against  the  stock 
certificate  stubs.  This  will  leave  unchecked  such  stubs  of  certifi- 
cates as  were  issued  in  exchange  for  some  other  consideration, 
and  those  must  be  compared  with  the  record  in  the  minute  book 
to  ascertain  whether  they  were  issued  upon  proper  authority  from 
the  directors.  The  return  derived  from  the  exchange  of  capital 
stock  must  appear  in  the  regular  books  of  account  under  some 
heading  which  expresses  its  character. 

If  it  is  found  that  stock  has  been  issued  to  a  promoter  in  set- 
tlement of  his  services,  the  auditor  should  ascertain  whether  steps 
have  been  taken  to  extinguish  this  expense. 

The  audit  of  the  regular  books  of  account  is  to  be  conducted 
as  described  in  Part  II.  During  its  progress  the  auditor  should 
observe  whether  important  transactions,  such  as  the  acquisition 
of  property,  the  placing  of  mortgages  thereon,  the  declaration  of 
dividends,  etc.,  have  been  duly  sanctioned  by  the  board  of  di- 
rectors. 

PERIODICAL  AUDIT 

The  Periodical  Audit  is  so  called  from  the  fact  that  it  covers 
a  statistical  period — usually  an  entire  fiscal  year.  The  one  de- 
scribed in  Part  II  is  an  example  of  a  periodical  audit. 

CONTINUOUS  AUDIT 

The  Continuous  Audit  is  the  same  as  the  periodical  audit  in 
regard  to  details  of  inspection,  but  it  is  taken  up  at  shorter  inter- 
vals— usually  once  a  month.  After  the  first  audit  subsequent 
audits  take  up  the  work  at  the  point  where  the  previous  one 
ended.  In  this  way  the  audit  is  carried  to  the  end  of  the  fiscal 
period,  at  which  time  the  report  is  rendered. 


SPECIAL  AUDITS  105 

INVESTIGATION  ON  ACCOUNT  OF  SUSPECTED 

FRAUD 

This  kind  of  work  calls  for  the  auditor's  best  efforts,  as  it  is 
frequently  a  case  where  his  wits  are  opposed  by  those  of  an- 
other. 

The  occasion  for  an  investigation  of  this  kind  may  arise 
from  a  variety  of  causes.  It  may  be  due  to  an  embezzling  clerk 
or  cashier ;  or  it  may  be  a  case  where  the  gross  profits  are  not  in 
proportion  to  the  amount  of  the  turnover,  which  would  indicate 
theft  of  merchandise  or  concealment  of  sales.  In  a  great  many 
cases  it  is  merely  "a  suspicion  that  something  is  wrong." 

Again,  the  investigation  may  be  needed  on  account  of  manipu- 
lation by  a  tricky  partner  who  aims  to  gain  an  advantage  over 
his  less  acute  associate.  This  course  is  sometimes  prompted  by 
the  preponderance  of  capital  interest  held  by  one  partner  over 
the  other,  who  hopes  by  apparently  depreciating  the  value  (or 
earnings)  of  the  business  to  make  an  advantageous  purchase  of 
the  discouraged  partner's  interest. 

Before  entering  upon  actual  work,  the  auditor  should  make 
a  careful  survey  of  conditions  in  order  to  localize  the  difficulty, 
if  possible.  It  is  also  important  that  he  should  mask  the  real 
object  of  the  investigation,  which  may  be  accomplished  best  by 
making  it  appear  that  it  is  merely  a  routine  audit.  The  course 
of  the  investigation  will  be  determined  largely  by  the  department 
under  suspicion,  or  by  the  opportunities  of  the  suspected  indi- 
vidual. 

If  the  cashier  is  the  suspected  person,  the  investigation  should 
be  centered  in  the  first  instance  upon  the  cash  book,  and  the  open 
accounts  receivable.  This  involves,  as  the  first  step,  the  balanc- 
ing of  the  cash  book  and  verification  of  the  balance;  then  the 
bank  statement  with  returned  cheques  should  be  procured,  and 
from  them  the  auditor  will  draw  up  the  reconcilement  himself. 
Next,  verification  statements  should  be  sent  to  all  book  debtors, 
as  described  under  Controlling  Account. 


106  RENN'S  PRACTICAL  AUDITING 

Both  sides  of  the  cash  book  are  to  be  footed  for  the  entire 
period  under  audit,  and  extreme  care  is  to  be  taken  that  the  foot- 
ings are  forwarded  correctly  both  as  respects  amounts  and  loca- 
tion in  columns.  Doubtful  figures  must  be  investigated.  Cash 
sales  and  all  other  cash  receipts,  outside  of  those  from  credit  sales 
customers,  are  to  be  checked  from  their  place  of  record  into  the 
cash  book. 

The  cash  credits  in  all  ledgers  are  to  be  checked  from  the 
ledgers  into  the  cash  book,  and  it  must  be  ascertained  positively 
that  the  opening  and  closing  balances  in  the  cash  book  agree  with 
the  respective  balances  of  the  cash  account  in  the  ledger. 

The  deposits  as  shown  in  the  bank  book  are  to  be  identified 
with  the  entries  in  the  cash  book,  where  this  is  possible;  other- 
wise the  individual  items  from  the  deposit  slips  are  to  be  traced 
into  the  cash  book. 

Sometimes  the  auditor  may  intercept  an  effort  at  "kiting," 
or  an  attempted  eleventh-hour  restitution,  by  comparing  with 
the  cash  book  the  actual  contents  of  an  outgoing  deposit  before 
it  has  passed  out  of  the  office. 

The  disbursement  side  of  the  cash  book  must  be  vouched 
rigidly.  Original  invoices  as  well  as  receipts  must  be  exacted 
for  all  charges  to  impersonal  accounts,  and  great  caution  is  to 
be  observed  that  the  two  do  not  represent  duplicate  entries.  The 
invoices  must,  of  course,  be  properly  O.  K.'d  as  respects  receipt 
of  goods  and  correctness  of  price  and  extension.  All  charges  to 
personal  accounts  must  be  supported  by  receipts  and  the  reasons 
for  payment  are  to  be  ascertained.  Attention  should  also  be 
given  to  the  character  of  the  charges  to  impersonal  accounts, 
especially  those  which  are  easily  "loaded,"  such  as  expense,  sala- 
ries, wages,  and  merchandise  accounts. 

The  returned  bank  cheques  are  to  be  scrutinized  in  respect 
to  name  of  payee  and  amount,  and  they  are  also  to  be  compared 
with  the  entries  in  the  cash  book  in  regard  to  the  same.  All 


SPECIAL  AUDITS  107 

endorsements  on  cheques  are  to  be  examined  for  possible  evi- 
dence of  collusion. 

If  suspicion  points  to  the  concealment  of  sales,  the  first  point 
to  be  investigated  is  the  cash  sales  department.  Inspection  should 
be  made  to  ascertain  whether  the  safeguards  are  adequate,  and 
then  the  entries  in  the  cash  book  from  this  source  should  be 
checked  against  the  initial  records  of  cash  sales.  These  usually 
consist  of  counterfoil  copies  of  sales  tickets,  or  the  inside  record 
of  a  cash  register. 

Another  possible  leak  may  be  the  shipment  of  goods  on 
"charge"  accounts  without  entry  in  the  sales  book.  This  may  be 
due  to  lack  of  system,  or  it  may  be  done  advisedly  for  the  pur- 
pose of  appropriating  the  proceeds  when  payment  is  sent  in.  To 
discover  whether  this  has  been  going  on  the  auditor  should  check 
the  shipping  records  against  the  sales  book. 

In  cases  where  outright  theft  of  merchandise  is  suspected, 
some  system  for  detection  should  be  adopted,  and  should  include 
a  system  of  double-checking  the  contents  of  all  packages  before 
they  leave  the  establishment.  Proper  precautions  should  also  be 
taken  at  the  doors  to  prevent  employes  from  carrying  out  stolen 
goods  when  they  quit  work.  A  reorganization  of  the  shipping 
room  staff  may  also  prove  beneficial. 

If  suspicion  of  theft  is  based  solely  upon  the  percentage  of 
gain  on  the  turnover,  it  might  be  well,  before  instituting  other 
investigations,  to  determine  definitely  whether  the  per  cent  added 
for  profit  is  really  as  much  as  it  is  thought  to  be. 

If  there  is  belief  that  the  difficulty  centers  in  the  purchasing 
department,  a  thorough  analysis  of  the  merchandise  purchase  ac- 
count is  indicated  as  the  first  step.  Then  all  charges  thereto  are 
to  be  checked  with  the  original  invoices,  which  are  to  be  exam- 
ined closely  in  regard  to  all  salient  points,  viz.:  date,  to  whom 
made  out,  and  whether  properly  O.  K.'d  as  regards  receipt  of 
goods,  quantities,  prices  and  extensions.  A  feature  of  some  im- 
portance is  that  invoices  should  appear  on  printed  forms.  All 


108  RENN'S  PRACTICAL  AUDITING 

endorsements  on  returned  bank  cheques  relating  to  purchase  of 
merchandise  are  to  be  scrutinized  for  possible  indication  of  collu- 
sion. A  survey  of  the  internal  check  on  invoices  should  also  be 
made,  to  determine  whether  the  responsibility  for  passing  them  is 
sufficiently  distributed. 

The  foregoing  suggestions  are  based  on  conditions  where  the 
circumstances  direct  attention  to  some  particular  department, 
thus  localizing  the  investigation.  Where  there  is  merely  a  gen- 
eral suspicion  that  "something  is  wrong,"  and  the  auditor  cannot 
by  himself  discover  any  specific  "lead,"  then  the  general  audit 
described  in  Part  II  is  indicated  as  the  correct  course  to  follow. 

The  method  of  auditing  the  books  in  complete  detail  is  also 
to  be  followed  in  cases  of  partnership  disagreements,  of  which 
mention  has  been  made.  As  a  preliminary  step  the  auditor  should 
make  a  careful  study  of  the  co-partnership  agreement,  and  ob- 
serve during  the  audit  whether  its  provisions  have  been  duly  car- 
ried out  as  respects  the  individual  rights  of  each  partner. 

EXAMINATION  ON  BEHALF  OF  AN  INTENDING 
PURCHASER 

Examinations  on  behalf  of  intending  purchasers  are  made 
principally  with  the  object  of  determining  the  earning  capacity 
of  the  business.  Therefore  the  attention  of  the  auditor  should  be 
directed  chiefly  to  an  investigation  of  the  statistical  accounts,  to 
ascertain : 

First.  The  amount  of  the  sales  by  monthly  comparison,  and 
whether  they  are  bona  fide. 

Second.  The  cost  of  the  goods  sold,  and  whether  the  cost  is 
fully  stated ;  also  the  per  cent  of  gross  gain  on  the  turnover. 

Third.  The  expenses  and  what  per  cent  they  bear  to  the  turn- 
over ;  also  whether  they  are  fully  stated. 

Fourth.  What  amount  of  working  capital  is  required  to  con- 
duct the  business. 


SPECIAL  AUDITS  109 

The  foregoing  points  should  be  investigated  for  a  period  of 
sufficient  length  to  afford  ample  opportunity  for  comparison,  and 
to  serve  as  a  chart  for  judging  whether  the  enterprise  is  prosper- 
ing, or  the  contrary.  The  investigation  should  cover  at  least  three 
years'  business  and,  when  practicable,  should  cover  five  years. 

Aside  from  the  information  which  can  be  gathered  from  the 
books,  there  is  also  the  speculative  consideration  whether  the  en- 
terprise is  capable  of  expansion.  This  feature  is  considered  later 
in  this  chapter  under  "Good- Will." 

To  proceed  to  the  examination  in  detail: 

In  making  a  sale  of  course  the  cash  on  hand  is  not  involved, 
consequently  no  attention  need  be  paid  to  the  correctness  of  the 
cash  balance. 

As  regards  the  open  accounts  receivable  and  bills  receivable, 
if  they  are  to  be  purchased  outright  without  a  reserving  clause, 
they  will  require  the  most  rigid  investigation,  both  as  to  their 
genuineness  and  their  realizable  values.  A  cautious  purchaser, 
however,  will  reserve  to  himself  the  right  to  charge  back  such 
as  shall  prove  uncollectible,  and  will  also  withhold  a  fair  portion 
of  the  purchase  money  to  protect  himself  in  regard  to  them. 
Where  such  a  clause  is  inserted  in  the  contract,  no  investigation 
is  required  in  respect  to  these  accounts,  other  than  to  check  them 
from  the  trial  balance  into  the  ledger  as  proof  that  they  are  prop- 
erly recorded. 

The  Stock  of  Merchandise  will  need  to  be  inventoried,  as  of 
the  date  when  the  sale  is  consummated,  and  valuations  should  be 
made,  by  agreement,  either  upon  invoice  cost  less  proper  allow- 
ance for  depreciation,  or  by  appraisal.  In  this  connection  it 
should  be  ascertained  whether  the  goods  have  been  paid  for,  and  if 
it  is  found  that  they  are  still  unpaid,  proper  provision  should  be 
made  for  payment  in  concluding  the  purchase. 

Real  Estate,  Buildings  and  Personal  Property  would  doubt- 
less be  sold  at  an  upset  price,  or  by  appraisal.  However,  the 
auditor  should  ascertain  their  cost  by  analyzing  and  checking  with 


110  RENN'S  PRACTICAL  AUDITING 

vouchers,  in  complete  detail,  the  accounts  which  represent  them. 
A  point  of  especial  importance  is  to  examine  all  titles  to  the  prop- 
erties, and  to  ascertain  at  the  place  of  record  whether  they  are 
encumbered,  and  if  so,  to  what  extent. 

Good-Will  is  an  intangible  kind  of  asset,  but  has  value  in 
proportion  to  the  actual  prosperity  of  the  enterprise,  and  even 
prospective  prosperity  may  be  accorded  some  attention.  There 
are  many  considerations  which  enter  into  the  value  of  good-will. 
The  primary  one,  of  course,  is  the  earning  capacity  of  the  enter- 
prise; then,  where  the  property  is  not  held  in  freehold,  there  is 
the  question  of  the  duration  of  the  leasehold ;  the  prospects  of  its 
renewal ;  the  amount  of  competition  in  the  neighborhood ;  whether 
the  business  is  capable  of  expansion,  etc. 

The  value  of  good-will  is  usually  determined  by  the  principals 
to  a  sale,  and  without  doubt  they  are  influenced  by  the  auditor's 
statistical  statement,  gathered  from  the  books  of  account,  and  by 
his  report  of  surrounding  conditions.  To  qualify  himself  to  value 
good-will,  the  auditor  must  cultivate  the  ability  to  make  broad 
surveys  of  conditions  through  observation  and  by  judicious  in- 
quiry. 

Patents  should  be  valued  according  to  earnings,  and  it  would 
be  necessary  also  to  consider  whether  the  earnings  are  on  the  in- 
crease or  not.  A  further  point  for  attention  is  to  ascertain  what 
remains  of  the  patent's  original  term  of  seventeen  years.  As 
patents  are  manifestly  assignable,  investigation  should  also  be 
made  into  present  ownership. 

Copyrights  would  be  valued  in  almost  the  same  manner  as  a 
patent.  A  point  of  difference  is  that  the  original  term  of  a  copy- 
right runs  for  twenty-eight  years,  and  is  subject  to  renewal  for  a 
further  term  of  fourteen  years;  but  as  this  renewal  is  restricted 
to  the  author  or  designer,  or  to  his  widow  or  children,  it  is  evi- 
dent that  an  outside  purchaser  would  be  limited  to  the  original 
period  of  twenty-eight  years.  However,  copyrights  usually  out- 
live their  earning  power  long  before  the  original  term  has  expired. 


SPECIAL  AUDITS  111 


In  explanation  of  the  following  outline  it  may  be  said  that 
there  is  not  much  likelihood  of  either  assets  or  earnings  being 
understated  by  the  vendor;  on  the  contrary,  the  danger  is  that 
the  earning  capacity  may  be  represented  too  favorably  through 
understatement  of  cost,  or  through  omission  of  expenses. 

Check  the  latest  trial  balance  into  the  ledgers,  and  verify  the 
footings  of  the  trial  balance. 

Draw  up  a  balance  sheet. 

Analyze  all  capital  accounts  from  their  beginnings,  and  exam- 
ine vouchers  for  all  charges  to  those  accounts. 

Analyze  the  following  accounts  for  the  entire  period  under  ex- 
amination, and  in  summarizing  place  the  monthly  totals  of  the 
various  classes  of  items  opposite  each  other  during  the  different 
years,  for  comparison: 

SALES  ACCOUNT, 
PURCHASE  ACCOUNT, 
ALL  EXPENSE  ACCOUNTS. 

This  analysis  will  indicate  pretty  clearly  whether  there  have 
been  any  suspicious  fluctuations  in  the  business.  If  it  shows 
either  an  extraordinary  increase  in  sales  lately,  or  an  unnatural 
reduction  in  purchases,  or  a  conspicuous  decrease  in  the  expenses, 
there  will  be  cause  to  suspect  an  attempt  at  "salting,"  and  closer 
investigation  will  be  required. 

If,  on  the  other  hand,  the  figures  run  about  normally,  they 
may  be  accepted  as  genuine,  although  the  sales  book  may  still  be 
examined  profitably  for  the  last  thirty  days  or  so,  to  make  sure 
that  there  has  been  no  inflation  of  sales. 

In  preparing  the  Trading  account  and  the  Profit  and  Loss  ac- 
count for  his  report,  the  auditor  should  state  separately  any  items 
which  would  be  subject  to  modification  under  a  different  manage- 
ment; such  as  salaries  of  officers  or  managers,  rent,  interest  on 


112  RENN'S  PRACTICAL  AUDITING 

borrowed  capital,  etc.  Where  no  salary  has  been  charged  up  for 
the  proprietor's  services,  that  fact  must  be  noted  in  the  report,  in 
order  that  proper  allowance  may  be  made  for  this  item,  in  esti- 
mating future  expenses.  Also  any  earnings  not  strictly  a  result 
of  business  transactions  should  be  stated  separately. 

To  ascertain  the  working  capital  employed  in  a  business, 
take  the  amount  of  the  share  capital  actually  paid  in;  add  the 
liabilities  to  trade  creditors;  deduct  the  charges  to  investment 
accounts,  and  the  cash  on  hand.  The  remainder  will  be  the  actual 
working  capital  investment. 

To  arrive  at  an  estimated  value  of  the  inventory  for  advance 
information,  deduct  from  the  sales  account  an  average  per  cent 
for  gross  profit,  and  subtract  the  remainder  from  the  purchase 
account.  The  balance  is  the  approximate  value  of  the  inventory. 

Liabilities  of  the  vendor  do  not  concern  an  intending  pur- 
chaser further  than  to  require  precautions  that  there  shall  be  no 
lien  against  his  purchase. 

So  far  as  liabilities  are  any  indication  of  the  condition  of  the 
business,  that  information  can  be  gathered  from  the  balance 
sheet. 

EXAMINATION  ON  BEHALF  OF  A  CREDITOR, 
ACTUAL  OR  PROSPECTIVE 

The  purpose  of  this  kind  of  an  examination  is  to  ascertain  from 
the  debtor's  books  one  of  two  things :  whether  a  loan  or  other  in- 
debtedness already  in  effect  is  secure ;  or,  whether  a  loan  or  grant 
of  credit  pending  may  be  extended  with  safety. 

If  the  loan  is  to  be  made  upon  a  mortgage  secured  by  real 
estate,  the  examination  should  be  confined  to  matters  relating  to 
the  property  concerned.  Its  value  should  be  ascertained  either 
from  the  cost  shown  by  the  books,  or  by  appraisal.  The  title  is 
to  be  inspected  and  inquiry  is  to  be  made  at  the  recorder's  office 
in  regard  to  records  of  title;  also,  whether  the  property  is  en- 


SPECIAL  AUDITS  113 

cumbered,  and  if  so,  to  what  extent.  A  report  embodying  the 
foregoing  would  cover  the  requirements. 

If,  on  the  other  hand,  it  is  to  be  a  short-time  loan  or  a  grant 
of  credit,  such  as  nearly  all  trading  concerns  need  from  time  to 
time,  the  examination  should  be  directed  to  a  thorough  inspec- 
tion of  the  "quick"  assets,  and  to  a  survey  of  the  liabilities,  in 
order  to  determine  whether  the  assets  which  are  easily  converti- 
ble into  cash  are  sufficiently  in  excess  of  the  liabilities  to  warrant 
the  accommodation. 

Real  estate  investments  are  not  usually  given  much  attention 
in  connection  with  unsecured  loans;  although  such  investments, 
less  encumbrances,  must  of  course  be  stated  upon  the  balance 
sheet.  They  should  be  in  a  separate  division  from  the  "quick" 
assets. 

EXAMINATION  IN  DETAIL 

Check  the  latest  trial  balance  into  the  ledger. 
From  the  trial  balance  construct  a  balance  sheet. 
Examine  the  assets  in  the  following  manner : 

The  Cash  Balance.  Where  the  cash  balance  is  stated  at  a  mod- 
est amount,  it  may  be  accepted  without  investigation  further  than 
to  check  the  item  from  the  balance  sheet  into  the  cash  book. 

Should  the  cash  appear  abnormally  large,  however,  it  will  be 
necessary  to  make  close  inspection,  for  the  carrying  of  a  large 
cash  balance  while  seeking  credit  would  seem  inconsistent. 

Bills  Receivable.  The  possibilities  in  bills  receivable  for  fabri- 
cating assets  have  been  demonstrated  amply.  If  circumstances 
permit,  the  auditor  should  in  all  cases  confirm  bills  receivable  by 
communication  with  the  reputed  drawers.  However,  in  an  ex- 
amination of  this  character  it  is  hardly  permissible  to  resort  to 
that  measure,  and  the  auditor  must  be  content  with  a  preliminary 
examination  of  the  notes  in  respect  to  date,  amount,  time,  where 
and  to  whom  payable,  and  signature. 


114  RENN'S  PRACTICAL  AUDITING 

After  seeing  that  none  of  the  notes  are  past  due,  they  should 
be  checked  into  the  debtors'  accounts  in  the  ledgers,  to  make 
sure  that  they  came  through  regular  channels. 

In  the  case  of  notes,  either  singly  or  collectively,  for  an  un- 
usually large  amount  from  a  single  debtor,  inquiry  should  be  made 
as  to  his  responsibility ;  it  might  be  well  also  to  inspect  the  con- 
tract or  order  through  which  the  obligation  was  incurred. 

After  the  notes  have  passed  inspection  they  should  be  listed, 
and  the  total  should  agree  of  course  with  the  bills  receivable  item 
on  the  balance  sheet. 

Accounts  Receivable  should  be  examined  in  the  ledgers  in  de- 
tail: 

First.  As  to  their  origin ;  whether  they  originated  in  the  sales 
book  or,  if  elsewhere,  of  what  they  consist. 

Second.  As  to  the  length  of  time  they  have  been  outstanding ; 
whether  they  are  due  or  past  due.  In  the  case  of  past  due  accounts 
it  should  be  ascertained  what  are  the  expectations  of  securing 
payment. 

Third.  In  the  case  of  unusually  large  accounts,  inquiry  should 
be  made  into  the  standing  of  the  debtors. 

Fourth.  Inquire  whether  there  are  any  heavy  offsets  to  be 
considered;  such,  for  instance,  as  freight  charges  on  carload  lots 
which  were  sold  at  a  delivered  price,  with  the  freight  following 
shipment. 

It  would  seem  to  be  unnecessary,  but  it  will  be  safer,  to  in- 
quire whether  all  trade  discounts  were  deducted  before  sales  were 
charged  into  the  ledgers.  The  matter  of  probable  cash  discount 
on  sales  accounts  may  be  disregarded  in  an  examination  of  this 
kind. 

Inventory  of  Merchandise.  Where  an  inventory  is  submitted, 
it  may  be  confirmed  approximately  by  deducting  from  the  purchase 
account  the  estimated  cost  of  the  goods  sold  in  the  manner  de- 


SPECIAL   AUDITS  115 

scribed  in  the  preceding  section.     Where  no  inventory  is  fur- 
nished, it  may  be  estimated  by  the  same  process. 

Furniture  and  Fixtures,  and  personal  property  in  general  may 
be  listed  at  book  values,  unless  they  appear  excessive.  This  class 
of  assets  should  be  placed  on  the  balance  sheet  in  the  same  division 
with  the  other  investment  accounts. 

Real  Estate  and  Buildings.  The  item  of  real  estate  in  this 
kind  of  an  examination  has  been  treated  already.  Buildings  upon 
leased  ground  should  be  so  stated,  giving  book  values  and  the  time 
limits  of  the  lease. 

Good-Will  and  Leaseholds  have  comparatively  little  value  in 
connection  with  a  loan,  and  should  be  placed  in  last  position  upon 
the  assets  side  of  the  balance  sheet. 

LIABILITIES  AND  REVENUE  ACCOUNTS 

Liabilities  should  be  looked  into  carefully  to  ascertain  whether 
they  are  stated  fully  upon  the  books.  Reference  should  be  made 
to  the  purchase  account  to  see  whether  the  more  recent  purchases 
have  been  entered.  From  there  they  should  be  followed,  to  learn 
whether  they  have  been  paid  for,  or,  if  not,  whether  they  appear 
among  the  liabilities  as  unpaid  accounts. 

The  bank  deposit  book  should  be  inspected  for  the  last  four 
months  preceding  the  examination,  for  entries  of  personal  notes 
discounted;  and  such  notes  should  in  turn  be  followed  into  bills 
payable  account,  and  from  there  to  the  balance  sheet. 

Expense  Accounts  should  be  examined  in  detail ;  and  by  com- 
parisons it  can  be  learned  whether  all  important  expenses  for  the 
recent  period  have  been  met. 

Purchase  Account  inspection  for  a  recent  period  has  been  pro- 
vided for  already.  However,  the  examination  of  this  account  may 
be  extended  profitably  to  include  a  comparison  of  the  monthly 


116  RENN'S  PRACTICAL  AUDITING 

totals  for  the  last  six  months  with  those  for  the  same  period  of 
the  year  before.  This  inspection  should  expose  any  protracted 
failure  to  enter  purchases  on  the  books. 

Sales  Account  should  be  compared  similarly  for  a  six  months' 
period,  to  prove  that  there  has  been  no  "padding"  of  sales.  It 
must  be  remembered  that  the  accounts  receivable  have  been  ac- 
cepted as  genuine,  largely  from  the  fact  that  they  appeared  in  the 
ledgers  as  having  originated  in  the  sales  book. 

CONCLUSION  OF  THE  EXAMINATION 

If  credit  is  to  be  based  solely  upon  the  net  surplus  and  char- 
acter of  the  assets  the  investigation  is  completed  by  verification 
of  the  balance  sheet,  as  outlined  above. 

If  it  is  required,  however,  to  secure  information  also  in  regard 
to  the  earning  capacity  of  the  business,  the  auditor  should  analyze 
the  purchase  account,  the  sales  account,  and  the  various  expense 
accounts  for  a  period  of  two  years  at  least,  and  show  the  monthly 
results  for  each  year  in  parallel  columns.  It  would  be  necessary 
also  to  furnish  a  yearly  Trading  Statement  and  Profit  &  Loss 
account. 

FINAL  AUDIT 

FOR   THE    PURPOSE    OF    PARTNERSHIP    ADJUST- 
MENT IN  CASE  OF  A  RETIRING  OR 
DECEASED  PARTNER 

This  kind  of  an  audit  is  markedly  similar  to  the  one  described 
in  detail  in  Part  II  of  this  manual,  for  the  conditions  demand 
that  it  shall  be  made  in  a  thorough  and  exhaustive  manner.  In 
this  case,  however,  the  period  to  be  reviewed  cannot  be  left  to 
choice,  but  must  cover  the  entire  term  of  the  partnership ;  unless 
an  audit  has  been  made  at  some  previous  time,  in  which  case 
the  new  audit  would  begin  at  the  point  where  the  old  one  left  off. 


SPECIAL  AUDITS  117 

After  procuring  the  usual  abstract  in  the  form  of  a  trial 
balance  and  verification  of  the  cash,  the  next  step  is  to  make  a 
careful  study  of  the  co-partnership  agreement.  A  thorough 
understanding  of  this  document  is  imperative,  in  order  that  its 
stipulations  may  be  safeguarded  during  the  progress  of  the  audit. 

The  principal  points  in  these  agreements  comprise: 

First;  the  date  of  the  agreement,  and  the  names  of  the  respec- 
tive partners  and  their  places  of  residence. 

Second;  the  firm  name  under  which  it  is  proposed  to  conduct 
business,  the  line  of  trade  to  be  engaged  in,  location,  date  of 
beginning  and  term  of  duration. 

Third;  the  amount  of  capital  to  be  contributed  by  each  part- 
ner. 

Fourth;  the  amount  of  time  and  attention  to  be  devoted  to  the 
business  by  each  partner. 

Fifth;  the  amount  of  salary  to  be  drawn  by  each  partner. 
Sixth;  limitation  on  cash  withdrawals  by  partners. 

Seventh;  the  rate  of  interest  (if  any)  to  be  credited  to  the 
partners  on  their  investments.  Also  the  rate  of  interest  to  be 
charged  on  withdrawals. 

Eighth;  apportionment  of  profits  or  losses  between  the  part- 
ners. 

Ninth;  assignment  of  special  duties  to  individual  partners,  es- 
pecially the  right  to  sign  cheques  and  other  negotiable  papers. 

Tenth;  the  signature  of  each  partner  to  the  agreement,  prop- 
erly witnessed. 

In  connection  with  the  partnership  agreement  the  auditor 
should  give  special  attention  to  the  following  points : 

(a)  That  each  partner  has  actually  contributed  his  share  to 
the  capital,  and  whether  he  has  devoted  his  agreed  proportion  of 
time  and  attention  to  the  business. 


118  RENN'S  PRACTICAL  AUDITING 

(b)  That  each  partner  has  received  his  full  compensation 
in  the  shape  of  salary,  and  that  none  has  been  overpaid.     Also 
that  the  partners  have  been  duly  credited  with  interest  on  their 
investments,  if  the  agreement  stipulated  it. 

(c)  That  capital  withdrawals  have  all  been  charged  to  the 
proper  individual  accounts  of  the  partners,  and  that  interest  on 
same  has  been  charged  in  accordance  with  the  agreement. 

(d)  That  profits  or  losses  have  been  carried  in  proper  pro- 
portion to  the  individual  accounts  of  the  partners. 

(e)  Although  not  specifically  mentioned  in  the  agreement,  it 
is  the  auditor's  duty  to  see  that  each  partner's  personal  account 
has  been  charged  with  all  purchases  made  through  the  firm  for 
his  private  use,  as  well  as  any  merchandise  taken  by  him  from 
stock. 

There  are  still  other  points  to  which  more  particular  attention 
is  to  be  paid  than  in  an  ordinary  audit,  especially  as  regards 
provision  for  contingencies.  It  must  be  remembered  that  this 
audit  will  be  a  concluded  one,  and  therefore  does  not  afford  much 
opportunity  for  later  rectification  of  oversights. 

Usually  the  call  for  an  audit  of  this  kind  comes  from  the 
retiring  partner's  side.  Therefore,  in  his  capacity  of  representing 
the  absent  partner,  the  auditor  should  endeavor  to  protect  the 
interests  of  his  client.  Of  course  this  does  not  mean  that  any 
undue  advantage  is  to  be  taken  by  him,  but  rather  that  none  is  to 
be  permitted  to  the  other  side. 

In  valuing  the  inventory  of  stock  on  hand,  the  rule  of  "cost 
or  market,  whichever  is  lowest,"  does  not  apply  in  this  case.  The 
retiring  partner  is  entitled  to  his  share  of  full  cost,  plus  all  ex- 
penses of  placing  staple  merchandise  in  its  present  location;  but 
in  the  case  of  certain  lines  which  have  deteriorated  in  value  by 
growing  stale  or  out  of  date,  the  rule  of  charging  at  cost  does 


SPECIAL  AUDITS  119 

not  apply  and  an  appraisal  must  be  made  by  independent  ap- 
praisers. 

Fixtures  should  be  valued  at  cost  less  proper  allowance  for 
depreciation. 

Good-will  should  be  valued  upon  the  basis  of  past  earnings, 
with  due  consideration  for  the  fact  that  the  business  is  a  "going" 
concern. 

Where  an  immediate  settlement  is  to  be  concluded,  the  book 
accounts  should  be  valued  according  to  their  ratings  under  analy- 
sis. However,  where  circumstances  permit  of  the  necessary 
delay,  a  much  more  equitable  way  is  to  postpone  final  adjustment 
in  order  to  give  opportunity  for  payment  of  the  better  class  of 
these  accounts.  Under  this  arrangement  no  further  entries  should 
be  made  in  the  ledgers  containing  these  accounts  except  such  as 
relate  to  their  settlement.  An  adjustment  account  needs  to  be 
opened,  to  which  allowances  should  be  charged  and  from  which 
they  should  be  carried  eventually  to  the  accounts  of  the  respective 
partners.  The  proceeds  of  collections  should,  of  course,  be  divided 
among  the  partners.  After  a  reasonable  time  the  residue  of  these 
accounts  could  be  valued  much  more  accurately  than  at  first. 

The  auditor  should  survey  recent  expenditures  to  determine 
whether  they  included  any  prepayments,  such  as  rent,  discount  on 
notes  given  at  the  bank,  insurance,  etc.  If  such  are  found,  the 
retiring  partner  is  to  be  credited  with  his  share. 

In  justice  to  the  continuing  partner  a  survey  should  be  made 
also  in  respect  to  accrued  accounts,  such  as  wages,  interest,  taxes, 
etc.,  earned  but  unpaid.  If  such  are  found,  the  retiring  partner 
is  to  be  charged  with  his  share. 

The  routine  work  of  the  audit,  if  followed  as  suggested  in  the 
beginning  of  this  article,  will  have  verified  the  revenue  accounts. 
Finally,  a  careful  examination  of  the  balance  sheet  should  be 
made  for  the  detection  of  any  possible  oversight. 


120  RENN'S  PRACTICAL  AUDITING 

DIFFERING  FEATURES  IN  AUDITS  OF  VARIOUS 
LINES  OF  BUSINESS 

AUDITING  TRADING  CONCERNS 

The  audit  described  in  detail  in  Part  II  of  this  manual  covers 
every  requirement  for  auditing  the  books  of  a  trading  concern. 

AUDITING  MANUFACTURING  ESTABLISHMENTS 

In  auditing  the  books  of  a  manufacturing  concern,  or  any 
enterprise  where  labor  is  an  extensive  factor,  the  pay-rolls  are  an 
important  feature  for  the  auditor's  attention.  He  should  assure 
himself  that  safeguards  are  in  force  which  will  prevent  the  car- 
rying of  "dummy"  names,  or  any  over-payment  to  real  employes. 
There  should  be  a  sufficient  distribution  of  the  work  in  preparing 
the  pay-roll  to  prevent  collusion,  and  the  pay-roll  should  be 
certified  finally  by  the  manager  or  foreman.  It  is  desirable,  also, 
that  the  actual  paying  of  the  wages  should  be  done  by  some  person 
who  has  no  connection  with  the  preparation  of  the  pay-roll. 

If  further  investigation  seems  to  be  desirable,  an  occasional 
pay-roll  should  be  checked  into  the  time  book,  and  the  extensions 
and  footings  should  be  verified. 

It  is  important  that  a  proper  factory-cost  system  should  be 
maintained,  and  if  it  is  lacking  the  auditor  should  recommend  its 
installation. 

Probably  the  point  in  which  the  audit  of  a  manufacturing  con- 
cern differs  most  from  other  lines  is  in  connection  with  the  in- 
ventory. In  the  case  of  a  factory  the  inventory  of  stock  consists 
really  of  three  divisions,  viz. :  raw  material,  partly  finished  stock, 
and  finished  stock. 

Raw  Material  is  to  be  valued  at  initial  cost,  plus  all  expenses 
incurred  in  bringing  it  into  the  warehouse. 


SPECIAL  AUDITS  121 

Partly  Finished  Stock  is  valued  at  the  cost,  upon  the  above 
basis,  of  the  raw  material  which  has  actually  been  used  towards 
its  construction,  plus  the  direct  labor  so  far  expended  on  it,  and 
its  proper  percentage  of  overhead  expenses. 

Completed  Stock  is  valued  upon  the  same  lines  as  partly  fin- 
ished stock,  but  includes  its  entire  cost  to  completion. 

AUDITING  MINING  ENTERPRISES 

The  remarks  in  the  foregoing  article  in  relation  to  pay-rolls 
apply  equally  to  those  of  a  mining  concern. 

There  should  also  be  an  efficient  system  for  determining 
monthly  the  result  of  the  operations  from  the  revenue  point  of 
view. 

Often  there  is  much  confusion  in  the  distribution  of  expendi- 
tures between  capital  accounts  and  expense  accounts.  The  auditor 
should  see  that  any  errors  of  that  kind  are  corrected. 

Another  important  point  is  to  ascertain  whether  provision  is 
being  made  for  extinguishing  the  capital  accounts,  in  anticipation 
of  the  ultimate  exhaustion  of  the  mineral.  The  method  usually 
followed  is  to  set  aside  each  month  a  reserve  based  on  the  tonnage 
mined  during  that  month. 

AUDITING  BANKS 

It  is  to  be  understood  that  these  suggestions  for  bank  auditing 
are  not  limited  to  governmental  inspection  requirements.  The 
federal  as  well  as  the  state  bank  examiners  work  under  direction 
of  their  respective  departments,  and  their  instructions  require  an 
investigation  adapted  to  the  special  purposes  of  those  departments. 
Their  mission  is  to  ascertain  whether  the  banks  are  solvent,  and 
that  the  banking  laws  are  being  observed. 


122  RENN'S  PRACTICAL  AUDITING 

Moreover,  owing  to  the  large  number  of  inspections  assigned 
to  each  examiner,  it  would  be  a  physical  impossibility  for  him  to 
make  the  detailed  inspection  in  each  case  which  is  contemplated 
in  this  article.  Therefore  the  following  suggestions  are  to  be 
construed  as  covering  the  requirements  of  an  independent  audit, 
made  by  a  professional  auditor. 

So  far  as  it  relates  directly  to  the  books  of  account,  the  audit 
of  a  bank  does  not  differ  materially  from  that  of  any  other  line 
of  business.  To  do  the  work  thoroughly,  the  same  attention 
should  be  paid  to  the  details  of  footing  the  books  of  original  entry, 
and  following  the  entries  forward  into  the  general  ledger,  as 
would  be  given  to  the  books  of  a  trading  concern.  The  revenue 
expenditures  and  transfers  through  the  journal  should  be  sup- 
ported by  vouchers,  the  same  as  in  other  lines  of  business. 

At  this  point,  however,  the  banking  business  assumes  dis- 
tinctive features,  for,  dealing  exclusively  in  cash,  there  can  be  no 
equivalent  to  the  Trading  Account  of  other  lines;  therefore  the 
auditor  cannot  make  any  calculations  from  that  standpoint.  Of 
course,  there  is  the  revenue  from  loans  and  discounts,  but  as  the 
volume  of  loans  and  the  rate  of  interest  both  fluctuate  constantly, 
it  cannot  be  used  as  a  guide. 

Owing  to  this  inability  to  secure  confirmation  through  the 
statistical  accounts,  it  is  evident  that  the  proper  way  to  prove  the 
balance  sheet  is  by  independent  verification  of  each  item. 

The  audit  should  be  made  to  correspond  with  the  close  of 
business  on  a  certain  day,  and  whenever  it  is  practicable  to  arrange 
it,  by  all  means  let  it  be  on  the  last  day  of  the  month.  This  will 
save  much  extra  labor  for  the  bookkeepers  of  the  bank  under 
audit,  as  well  as  those  of  its  correspondents.  It  will  also  make 
it  possible  to  utilize  the  regular  monthly  statements  to  depositors, 
for  verification  purposes.  It  is  not  necessary,  however,  to  wait 
for  the  closing  hour  before  making  a  beginning ;  on  the  contrary, 


SPECIAL  AUDITS  123 

it  is  desirable  that  the  work  should  be  advanced  as  far  as  possible 
during  the  day  on  which  the  audit  is  begun. 

An  important  part  of  the  work  may  be  accomplished  in  ad- 
vance by  counting  the  reserve  during  business  hours,  this  should 
be  gauged  so  that  it  will  be  completed  by  the  time  the  tellers  have 
balanced;  in  order  that  then  their  cash  and  cash  items  may  be 
taken  immediately  in  hand  for  verification. 

After  the  reserve  has  been  counted  the  auditor  should  place 
the  money  under  lock,  so  as  to  have  it  under  his  personal  control 
during  the  time  occupied  in  verifying  the  tellers'  balances.  Should 
there  be  occasion  to  draw  on  the  reserve  while  it  is  in  the  auditor's 
possession,  he  should  not  permit  anyone  else  to  have  access  to  it, 
but  should  hand  the  money  out  himself. 

On  the  first  night  of  the  audit  a  complete  summary  of  the  cash 
count  is  to  be  made,  which  shall  show  in  separate  groups  the 
various  items  which  enter  into  it.  Of  course  the  total  must  agree 
with  the  Cash  Account  in  the  general  ledger. 

A  schedule  is  to  be  made  of  the  cheques  on  other  banks  car- 
ried over  by  the  tellers ;  this  should  show  in  detail  the  date  of  the 
cheque,  names  of  the  drawers  and  endorsers,  the  bank  drawn  on, 
and  the  amount.  The  auditor  will  see  that  these  cheques  are 
included  in  the  "clearings"  next  day,  and  will  also  enclose  a  verifi- 
cation statement  with  each  clearing  house  package,  requesting 
endorsement  as  to  correctness,  and  its  return  to  the  auditor's 
office. 

The  receptacles  containing  securities,  discounted  notes  and 
collateral  should  be  sealed  over  night  with  the  auditor's  private 
seal,  awaiting  examination  the  next  day. 

Verification  statements  should  be  dispatched  on  this  night  to 
all  banks  to  whom  balances  are  due,  and  should  likewise  be 
requested  from  depository  banks  and  others  from  whom  balances 


124  RENN'S  PRACTICAL  AUDITING 

are  owing.  Reports  should  also  be  requested  from  every  bank 
holding  drafts  or  cheques  for  collection  on  which  no  returns  have 
been  made. 

By  the  time  the  counting  of  the  cash  has  been  completed,  the 
assistants,  who  have  meanwhile  been  balancing  the  general  ledger, 
and  drawing  off  the  balances  from  the  depositors'  ledgers,  will 
have  finished  their  work.  After  agreeing  the  total  of  the  deposi- 
tors' ledgers  with  the  controlling  account,  matters  may  be  post- 
poned safely  until  next  day. 

Next  morning,  while  the  auditor  is  constructing  the  balance 
sheet,  one  of  his  assistants  should  be  preparing  such  schedules  as 
will  be  required  in  connection  with  verification  of  the  same. 

On  this  day  verification  statements  are  to  be  sent  to  all  deposi- 
tors whose  names  appear  on  the  schedule  drawn  off  the  night 
before.  A  sufficient  force  must  be  set  at  filling  in  the  blank  spaces 
of  these  forms  to  expedite  the  work  properly. 

In  the  first  trial  of  this  method,  some  judgment  must  be 
exercised  in  the  preparation  of  these  forms,  which  should  be  in 
the  shape  of  a  circular  letter.  They  should  state  in  effect  that  the 
bank  management,  with  a  view  of  conserving  the  best  interests 
of  its  depositors,  had  inaugurated  a  system  of  having  the 
bank  audited  periodically  by  independent  auditors ;  that,  in  order 
to  make  these  audits  effective,  it  is  necessary  for  each  depositor 
to  pass  upon  the  correctness  of  the  balance  to  his  credit  at  the 
date  of  the  audit,  viz. :  date,  ;  amount,  . 

He  should  be  requested  to  return  the  verification  letter  either 
endorsed  "Correct,"  or  with  notation  of  any  exceptions;  these 
statements  in  all  cases  to  be  returned  to  the  auditor,  through 
return  envelopes  sent  out  with  them.  A  suggestion  should  fol- 
low that  the  depositor's  monthly  statement  is  awaiting  him  at  the 
bank,  and  that  it  is  hoped  he  will  call  for  and  check  the  same  over 
promptly. 


SPECIAL  AUDITS  125 

The  next  item  in  order  for  direct  verification  is  the  notes  held 
by  the  bank.  The  author  has  paid  his  compliments  to  bills  receiv- 
able several  times  heretofore,  and  will  only  repeat  that  they  must 
be  verified  by  communication  with  both  makers  and  endorsers.  It 
is  desirable  that  the  verification  statement  be  so  constructed  that  it 
will  indicate  the  original  amount  of  the  note,  less  any  partial  pay- 
ments. It  is  believed  that  this  form  will  more  surely  direct  atten- 
tion to  any  omission  of  credit  for  partial  payment,  than  a  mere 
statement  of  the  net  amount  would  do. 

Unnecessary  handling  of  the  notes  may  be  avoided  by  drawing 
up  a  schedule  of  the  same,  and  examining  the  collateral  at  the 
time  when  the  verification  statements  are  being  made  out.  The 
collateral  is  to  be  listed,  and  it  is  to  be  noted  whether  the  values 
are  sufficient  to  protect  the  loan ;  also  whether  it  has  been  properly 
endorsed  over  to  the  bank. 

Notes  rediscounted,  in  attorneys'  hands,  or  with  banks  for  col- 
lection, must  be  verified  by  letter. 

All  securities  held  by  the  bank  are  to  be  inspected  at  one 
sitting. 

Outstanding  cash  items  in  transit  are  to  be  verified  from  the 
remittance  register  as  at  date  of  the  audit,  and  a  list  of  those  still 
outstanding  at  the  close  of  the  audit  is  to  be  incorporated  in  the 
report. 

Outstanding  certificates  of  deposit  and  unpaid  dividend 
cheques  are  listed  and  the  total  compared  with  representative  item 
on  balance  sheet. 

By  this  time  returns  from  statements  sent  out  or  requested 
will  be  coming  in.  Each  day's  arrivals  should  be  checked  against 
the  respective  schedules,  and  delinquents  should  be  urged  to  send 
them  in,  so  that  all  accounts  may  stand  verified  by  the  time  the 
routine  work  of  the  audit  is  completed. 


126  RENN'S  PRACTICAL  AUDITING 

As  intimated  in  the  beginning  of  this  article,  the  detail  work 
relating  to  the  books  of  account  does  not  differ  materially  from 
that  in  other  lines  of  business,  therefore  a  study  of  Part  II  of 
this  manual  should  provide  all  additional  information  necessary 
to  a  complete  audit  of  a  bank. 


GEORGE    B.    RENN 

PUBLIC    ACCOUNTANT    AND    AUDITOR 

REGULAR     AND     SPECIAL.     AUDITS 
EXAMINATIONS.     INVESTIGATIONS 

1341    DAKIN     STREET 

PROFESSIONAL    ENGAGEMENTS 

SOLICITED  CHICAGO 


127 


INDEX 

Page 

Accounts  Payable  controlling  account 24 

Receivable  controlling  account 23 

Analysis  of  accounts 20 

Audit  for  partnership  adjustment 116 

Auditing  banks   121 

manufacturing  establishments  120 

mining   enterprises   121 

practical  directions  for 29 

trading   concerns 120 

Auditor's  attitude  toward  the  office  staff 19 

certificate   51 

relation  to  his  client 18 

report,  The 50 

report,  A  specimen 52 

responsibility 18 

working  sheet 26 

"      illustrated 27 

Balance  sheet,  The 48 

"      form .....80,  81 

Bank  balance  33 

Bills  Receivable  and  securities 34 

Books  of  corporations,  first  audit  of 101 

Cash  balance  31 

"      book 36 

Combined   controlling  account 25 

Completed  stock  121 

Condensed  outline  of  an  Examination Ill 

128 


INDEX  129 

Continuous  audit   104 

Controlling  account,  The 21 

"           accounts,  illustrated 23,  24,  25 

Copyrights    110 

Different  kinds  of  audits 17 

lines  of  business  classified 16 

Differing  features  in  audits 120 

Dividend  book  102 

Errors  in  accountancy 15 

"       of  principle  15 

Examination  for  a  creditor 112 

"    an  intending  purchaser 108 

Final  audit  for  partnership  adjustment 116 

First  audit  of  books  of  corporations 101 

Form  of  Auditor's  report 53 

"       "   Auditor's  working  sheet 27 

"    Balance  sheet  80,    81 

"       "    Controlling  accounts  23-25 

'    General  Profit  and  Loss  account 82-85 

"       "    Individual  Profit  and  Loss  accounts 86-97 

"   Summarized  Trial  Balance 98,    99 

"   Turnover  28 

Fraud  16 

Furniture  and  Fixtures 115 

General  consideration  of  principles  and  methods 13 

Good-Will    1 10,  115 

Investigation  on  account  of  suspected  fraud 105 

Journal,  The 45 

Leaseholds  and  Good- Will 115 

Liabilities   115 

Merchandise  inventory   109,  1 14 

how  to  estimate 112 

Minute  book  .  .   101 


130  RENN'S  PRACTICAL  AUDITING 

Order  of  procedure 31 

Part  1 13 

"     II    29 

"     III    101 

Partly  finished  stock 121 

Patents    110 

Periodical  audit 104 

Practical  auditing 29 

Profit  and  Loss  account,  The 48 

forms    82-97 

Purchase  book 43 

Raw  material  120 

Real  estate,  buildings  and  personal  property 109,  115 

Review  and  conclusion  of  the  audit 46 

Sales  book   44 

Special  audits  101 

"       instructions  29 

Specimen  report  52 

Stock  certificate  book 102 

Stock  ledger 102 

Subscription  book   101 

Technical  errors  15 

Transfer  book  102 

Trial  balances  33 

Turnover  28 

Vouchers  20 

Voucher  Register 41 


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